When Business Loans Are a Bad Idea

When Business Loans Are a Bad Idea

Ready to start applying for business loans? Are you sure? Before you delve into the application process, consider your situation carefully. There’s no doubt that an entrepreneurial spirit and a great business idea make a killer combo but that’s not all you need to qualify for most business loans. Assessing where you’re at and whether you’re ready to start procuring capital will help ensure that you start strong and on sure-footing.

Here are some tell-tale signs that applying for a business loan is a bad idea right off the bat. Because we’re all about being proactive, we’re including tips on how to address the factors which may be impacting you today, so that you can set yourself up for success in the coming months and years.

What Type of Venture Are We Talking?

What’s the nature of the company or product you’re looking to fund? If the venture you’re embarking on is high risk, you might consider pitching directly to investors, giving them equity in the company. That way if the venture fails, you are not indebted to anyone. Prior to being able to pitch to angel investors or venture capitalists, here are tips on what you need to do.

Your Personal Credit Score Sucks

Prior to applying for any loan, make sure your credit is up to snuff. You can check your credit completely free of charge and obtain a detailed credit report once a year. It will include reports from each of the major credit reporting agencies in the United States (Equifax, Experian, and TransUnion). As a rule of thumb, anything below 630 is considered a poor credit score.

Individuals with low credit scores can have a significantly harder time procuring business loans (find lenders) and locking down better interest rates and terms. So, it may be worth the effort of cleaning up one’s credit prior to seeking external funding.

If this is where you’re at, don’t fret. Focus on building up your credit and really fine-tune your business idea. Who knows, maybe that extra time will open up even more opportunities for you in the long run.

If you have a low personal credit score, or one that does not seem as high as it should be based on your credit history, make sure to go over your credit history in detail. Contest any and all credit reporting errors in writing, as advised by the FTC.

A recent study by the Federal Trade Commission found that as many as “one in five consumers had an error that was subsequently corrected by a credit reporting agency after it was disputed. (source: Marketwatch).” Hence, errors in reporting are common. It is well worth your time and energy to fish for these errors and report them so that they can be removed from your personal credit history.

Your Business Credit Score Sucks

Unlike personal credit scores which generally range from 300-850, your business credit score will range from 0-100, with 100 being the highest possible rating. Businesses that carry large balances of debt in relation to their available credit limits (called the “balance-to-limit ratio”) may see this have a negative impact on their credit rating. So, even if you have an available credit line of $100,000 it may be smart to use only a fraction of that available credit. Your payment history with vendors, number of times your business credit score has been pulled, and even your business structure (as a corporation, sole proprietorship, etc.) are factors which can contribute to your business credit score. Tips on how to improve your score can be found in this SBA article by business credit expert Mark Carbajo.

Innovative Start-ups Can Have a Tougher Time Securing Business Loans

Are you trying to create something new and innovative that really pushes the boundaries? Do you need a whopping amount of cash for those newest technologies that will enable you to be the best start up company the world has ever seen?! Okay, so maybe that sounds a little far-fetched, but it seems to be the MO for a lot of budding entrepreneur types.

Not to squelch your fiery enthusiasm, but those super-specialized, never-been-done-before businesses are oftentimes not particularly enticing to most lenders. With little track record and few to no similar businesses to look at for viability and market projections, investors have little data to go on which is what they need to make an educated decision. If, however, your credit score is good and you feel comfortable putting up your personal assets as collateral, you may feel you’re ready to proceed with applying for a loan. This brings us to our next point…

Consider the Potential Collateral Damage

Business loans are definitely a bad idea if, after careful consideration, you decide you have too much to lose.

Business loan administrators will typically have you collateralize the loan against any and all of the business assets that you own. So, if you’re putting up collateral in order to secure a loan, ask yourself if it’s really worth putting everything on the line. This is doubly true if your venture is high risk.

Having the energy, drive and determination it takes to start your own business is a noble feat indeed. Doing your research and reading articles like this one is smart. But being able to take a sober assessment of where your business is at and determine whether it’s smart to apply for a loan today, a year from now, or not at all is pure wisdom.

For more information on applying for a business loan, click here.