When you are aspiring to open your own business, you will need to have a lot of funds to pay for a lot of things. You need to pay for the premises where your business would be based, sustain the business’ capital, pay off worker funds and fund the production process. You would also need to pay for the machines and training necessary to make your production and manufacturing smoothly and get them delivered on time.
Considering these items to pay for and consider, you need to have enough funds to pay for them all. If your budget is not enough, getting a small business loan can help you with your financial problem.
What are Business Loans?
Business loans basically serve as a business or company’s temporary capital while they do not have the funds necessary to support their operations. It could be used for paying salary, purchasing new equipment, manufacturing products for distributing final products.
Where to Apply?
In order to apply for business loans, they must have key documents that would prove their business’ activity and financial statuses such as bank statements, tenancy contracts, balance sheet, assets, and company details. Borrowers are also advised to present their plans with regards to where the borrowed money will be allotted so the lender will have an idea.
Once they secure the documents necessary for the loan, they can either approach a bank or a moneylender who can approve or deny their application. Banks are stricter when it comes to assessing applications, requiring applicants to submit all the necessary requirements and have a good financial standing. Failure to achieve this rule would result in a lower approval rate.
If the applicant’s financial standing is low and they have a bad credit rating, they can apply for a business loan through moneylenders. These moneylenders have a laxer loan application review and even those with bad credit ratings can apply.
Do You know What Happens if You Failed to Maintain Your Loans Payments?
If you have applied for personal loans before, you will be aware that applying for them comes with pros and cons and it will be recorded on your credit rating. If you pay your dues on time and pay them off without any problems, you are eligible to borrow again for a higher amount. If you don’t pay and end up defaulting them, your credit rating decreases and it reduces your chances of getting approved for another loan.
The same effects occur with business loans.
For business loans, approval has a positive impact on your credit score especially if you successfully paid it off and you only took on one loan. However, if you take on more loans or debts and become unable to pay the repayments, your credit rating will decrease.
Banks are stricter when it comes to reporting loans to credit agencies who record the credit reports of every individual. Licensed moneylenders are not as strict when it comes to this rule, but they will report it should the borrower fail to respond to any correspondence.
What Should You Do So It Won’t Affect Your Credit?
When you do apply for business loans and also have personal loans to deal with, you should make sure you do not mix them together to make it easier for you to pay them properly.
Here are some tips to help you ensure that your business loans won’t affect your credit rating:
- Get a business or personal credit card
In order to manage your business expenses better, it is best if you use a business credit card to handle these expenses. Do not use the card for other expenses and only use it for things related to your business.
If you are unable to get a business credit card, apply for a personal credit card. However, if you do get a personal credit card for your business, make sure you pay all your bills and cash advances on time because if you do not, it will be a negative mark on your credit report.
- Do not register as a sole proprietor
If you are running your business on your own, it is difficult to manage both your personal and business credit separately since you are the only person taking on the liability that comes with the business. As a result, you can be sued in court for business-related debts. Before you start your company, it is best to launch it as a private limited company since the liability will be separate from your name.
- Check other funding sources
Before considering loans and credit cards to fund your business, check other funding sources available that can help you with the funds. You can borrow from a family or a friend or use backup savings to fund your business temporarily and replace it when you get funds. These loans won’t show up in your records and affect it should you end up paying your family or friends late or if you haven’t replaced the funds on account you took it from.
- Talk to your selected moneylender
Finally, before you apply for a loan, speak to the moneylender you selected if they will report your loan to credit agencies when you show signs of being unable to pay. Select a trustworthy moneylender who won’t transmit your details to credit agencies immediately until payment cannot be recovered through all available mediums. Moneylenders would not take drastic action when it comes to payment recovery, especially if the borrower themselves have sought for an extension or change of payment terms.
Just like a personal loan, business loans also have consequences that borrowers must remember if they failed to pay them monthly. Before you apply for the loan, consider if you will be able to pay it without problems and if you really need it. If you do need the loan, make sure you have plans in place to help you pay off the loans immediately.
Remember, your first months of income should not be used just to pay your dues and there will come a time you will need a good credit rating so think wisely!