Other than common knowledge of getting a low interest business loan with low credit utilization, and a long credit history. Before we go out of the box with much more detailed information; the borrower has to start with a simple tradeline. Underwriters not only look for good payment history but they also look for high credit limits because this shows responsibility and high income of the individual.. Simply put they look for quality tradelines in high amounts. A tradeline is a line of credit or term loan that has aged with a good payment history. Now this is just one piece to the seven puzzle pieces written below to help you get a low interest business loan.
TIP #1 Establish Quality tradelines:
Everyone wants a long term 5-10 year business loan with low APR, but in order to get that you need to show the lender and underwriters that you have high quality tradelines. For beginners this can be as simple as a $1,000 credit card. Once you have that tradeline aged and have a positive payment history, this will leave you open to upgrade to a higher limit with lower interest, as you repeat the process of making positive payments your credit limit will go up resulting in higher quality tradelines. Next having versatile tradelines that are high in dollar quantity such as a mortgage, on a house or a car. This shows that you are responsible for paying back large loans which will open you up for larger and lower interest business loans. Not only does this build your credit but it shows how much money you can borrow and be financially comfortable which makes the lender comfortable with the amount they are letting you borrow. Apart from this, when it comes to your tradelines they want to see consistent payments made in full or over the balance, not minimum payments. This shows both the under-writers and lenders that you are making enough income to satisfy the line of credit or term loan.
TIP #2 Have Assets
Having quality assets such as stocks, cars, and real estate that you can use as collateral gives the lender and underwriter good faith that not only do you desire the loan, but you are willing to put up valuable assets as liens for the loan. This will help give you a low interest business loan as the banks will consider you low risk. This reason is because if any case you’re not able to satisfy your loan schedule they will take the equity from your assets. This puts more pressure and motivation on the borrower by making sure that the small business loan is allocated appropriately to produce more revenue to satisfy the working capital repayment. Collateral always gives a small business loan a lower interest.
Tip # 3 Financial History
Lenders and underwriters want to see your Profit & Loss Statements, balance sheets and tax returns. Through analysis of these 3 documents the underwriter will make the best decision on whether or not they will approve the loan as they will see your revenue model, gross income and profit and loss statements. If the financial statements are excellent the underwriter will give an offer with low interest as the borrower has credentials under good financial history. Many lenders do not provide capital to provide losses, especially if they are growing. Also many lenders do not provide capital to provide losses especially if they are projected to continue.
Tip # 4 Company Financial Projections
When a lender is giving out a business loan in high amounts with low interest. They want to see the financial projection of how the small business loan will benefit the borrower. For example if it is a 5 year loan the underwriter and lender want to see a financial projection with the loan and without the loan to not only determine a decision but also see if the borrower is low risk to be given the low interest business loan. Lending and borrowing has to be mutually beneficial: the borrower needs to use the capital to grow and the lender needs to make his or her money back through the loan schedule.
Tip #5 Company Overview and Executive Summaries
Before determining an approval for a low interest business loan the underwriter will want to see a company overview or executive summary of the business. With thousands of industries and occupations, risks vary per industry. The lender and underwriter want to understand the business, industry, revenue, model, target customers and reasons for seeking financing. The best reason for seeking finance is through growth of their current business, this works in tandem with a company’s financial projections as the lender will know the money that is borrowed will be mutually beneficial to both the lender and the borrower, thus helping to achieve a low interest business loan. The lender will also want to know the owner and other principals involved in running the business and their experience in the industry to make sure the capital given is under good deployment.
TIP # 6 Borrower Profile
There isn’t just one piece to the puzzle when trying to achieve an offer for a low interest business loan as there are many. Moving outside the box, the lender and underwriter want to see the TTM revenue which is the trailing 12 months, which show consistency. Again they also want to see your historical revenue and projected revenue. Revenue is vanity, and profit is sanity so they are also looking to see historical net income margin trends and projected net income margin trends. A lender wll grade this based on Very Strong/Low Risk, Strong, Stable/Neutral, and Weak/High Risk. You can be strong in a few areas such as having strong revenue but if your projected revenue is weak then an underwriter may decline or up the interest on your loan.
Tip # 7 Cash Flow
Credit is one thing but a lender wants to see your current cash flow, and they do this through cash runway months and EBITDA before declaring an approval for a low interest small business loan. Cash runaway months is if you weren’t to make a single dollar today how long it would take you to file bankruptcy. A good cash flow runaway is 12+ months in the lender’s eyes which would result in a low interest business loan. Next EBITDA which is earnings before interest taxes, depreciation and amortization. The best way to calculate this approximately is multiplying your profit margin by your annual revenue. A lender wants to see at a minimum of $250,000 in EBITDA before deciding on approving you on a loan. Decreasing EBITDA margins for lenders can be a point of concern, but ultimately this issue depends on the overall EBITDA margin. As many lenders restrict loan size and their ability to lender based on EBITDA. Typically the lender pool will be larger if the company EBITDA is above $2 million.
Tip # 8 Industry
Your industry also plays an important role when deciding whether or not you are going to get a low interest business loan or even a business loan at all. Industries that are favorable in an underwriter’s criteria are Restaurants, Auto Repair and Gas Stations for example. This is because these industries have high demand which is considered low risk. Everyone needs to eat so restaurants are a good industry to get a low risk business loan. Next Auto Repair as many people travel by vehicle there will be a lot of instances where the car needs to be repaired and serviced. Lastly, gas stations because many people drive on the road in vehicles everyday Gas Stations are in high demand. Some industries that are high risk are Law Firms, and Boat Dealers. Law Firms carry high risk because they deal with hundreds of thousands of dollars in cases and if the law firm loses more cases than they win, they not only lose their reputation but money as well. In a lender’s eyes a law firm is high risk. The other example are Boat Dealers, as Boats depreciate every year and there is a low populated market for it. If the boat dealer can’t sell the boat in a timely fashion as the clock is ticking on its depreciation, then the boat dealer will lose money and will not be able to pay back the lender. I highly recommend that any business owner starting out should start out with safer industries such as Contractors and Light manufacturers. Now don’t get me wrong, high risk industries such as Pawn Shops can be successful but know that your percentage is lower than if you were to open up a retail store which is considered low risk.
Tip #9 Employee Size
Most lenders are looking to lend to larger companies that have material headcount because it indicates the potential for using many other bank services and offerings as well as a maturity of the company.All lenders will need to validate financial performance. Company prepared or Compiled statements represent the highest risk that issues will arise in closing diligence as lenders work to validate the numbers..Many lenders change their underwriting criteria over time based on the industry.
Tip #10 Loan Request:
The larger the loan amount is compared to revenues, the more hesitant lenders will be to provide the loan. Many lenders require strong collateral in order to structure their loans. Loans are much harder to place if the loan to value is greater than 80%. This helps the borrower get a low interest business loan because you are being reasonable within your financial statements. Biting off more than you can chew will either result in a decline or a very high interest loan.
One size doesn’t fit all as mentioned in the tips above there are a plethora of criteria that under-writers go through when approving a loan, and a low interest loan at that. Through a combination of the tips above you will be armed with knowledge to know the inside information that lender’s look for in approving a small business loan with low interest. This information is vital to any business owner as you can focus on the actual criteria that lenders and underwriters judge upon before approving a loan with low interest. So if you are reading this article and are baffled about a recent decline where you were strong in certain areas, that just may not have been enough to approve you for a low interest small business loan because you lacked in other areas in the tips mentioned above.