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Before You Apply for a Loan

You've heard that the best way to finance your business is with other people's money, so you're going to rush out to your neighborhood bank and apply for a loan. Right? Or you've been turned down by one bank, so you figure you'll apply for a bunch of loans at a bunch of different banks all at once; the more you apply for, the better chance that one will come through. Right?

Not so fast. Applying for a business loan has become much easier in the last few years, and banks have gotten more comfortable with small business lending, but there's still a good chance you'll get turned down, and you need to consider the long lasting effect too many loan and credit card requests may have on your credit record, and the emotional toll it will take on your confidence.

Whenever a company checks on your credit, that inquiry is listed on your credit record, even if they don't approve your application. Having too many inquiries will make lenders nervous, and a history of turn-downs can make it harder for you to get credit even years in the future.

So take care. Before you apply for a loan, take the following simple steps:

Do a little investigating.
Speak with the bank or lending institution and find out what kinds of companies they lend to. Some banks shy away from certain industries, or companies in trouble, or companies of less than a certain size. If you don't fit the profile of companies they lend to, don't bother wasting your time.

Check your credit history.
If you have a blemished credit record, try to clean it up before you start applying for new credit. If you have a marginal credit record, only apply for loans from lending institutions that accept companies or people with marginal credit. Expect, however, to pay much higher interest rates.

Get your business records in order.
Most lending institutions will want to see your books and tax returns.

Find a lending institution that regularly lends to small business.
Many banks don't know how to assess the viability of a small business loan, so they tend to be more difficult to secure approvals from.

Do you fit the profile of a likely business loan candidate?
The kind of small businesses banks really like to lend to are: more than two years old, profitable for at least the last two years, good credit history. If you don't fit this profile, make doubly certain whether the bank or lending institution you are applying to will even consider your application.



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