Have Your Finances in Order before Taking out a Loan for Your Business

A large number of people have lost their jobs during Covid-19, and some of them have thought of starting their businesses instead of finding a new job to end up with unexpected redundancy. Well, if you are starting your business at this time, you will likely have a solid business plan and enough money in your emergency corpus to apply to it.

Even if you intend to take out a loan, you would still have some money set aside to invest in your business. It is because most of the lenders are hesitating to sign off on loan applications during the pandemic.

As far as it is about emergency money for the unemployed in the UK , you will not have any problems having them approved your application. This is because these loans are of a small amount. However, if you are looking to apply for a loan to fund your business, you will have to ensure that your personal finances are in order. The stronger your financial history, the better it is. Here is what it does mean:

Be debt free

If you are looking to borrow money from a lender to invest in your business, make sure that you have settled all of your current debts. Lenders will find out if you can manage to repay your business loan, and if you have already taken on multiple debts like credit card bills, 15-minute loans, and other short-term loans, they will be skeptical about your repaying capacity.

Business loans are quite expensive, and it may be hard to keep up with repayments when you have other financial obligations. A rule of thumb says that you should pay off all your current debts before seeking a business loan.

However, it cannot be possible all the time to be debt-free. For instance, you may be managing a mortgage or a short-term installment loan. To increase your approval chances, you will have to prove that you can manage both debts. Here comes the role of your business plan.

Have a strong business plan

You will have to submit a copy of your business plan to your lender because they would like to get an insight into the possibility of your business to survive the competition. Make sure that your business plan covers all points to make them feel that you have the potential to generate profits with your creative strategies.

Since your business will take some time to reach the breakeven point, lenders would like to have you another income source. Do not forget that you have to pay off the loan whether your business fails or not. A lender may ask you about the ways to repay your debt in case your business fails to generate profits.

Even though you are confident that you will go places, you should have a backup so you do not fall behind repayments. Having repayment backup plans will allow you to convince the lender to sign off on your application.

Keep your expenses as minimum as possible.

Your lender will look over your bank statement to have an idea of your current financial condition. The purpose behind doing so is to check your affordability. Even if you are debt-free, it can be hard to get approval. It is because your expenses are high enough.

A good rule of thumb says that you should have some money left enough to repay the debt after paying all of your current expenses, including money to be set aside for emergency purposes. Try to create a budget and take stock of your spending. Make sure that you are not spending money on unnecessary things. The more you cut back, the better.

Avoid making a recent big purchase if it is not essential, and if it is a must, try to pay for it outright. Otherwise, your debt-to-income utilization ratio will go up, lowering down the chances of borrowing money successfully.

Improve your credit rating

Despite putting in collateral, a business loan can be quite expensive. If you already have a bad credit rating, you will be either turned down or charged a high-interest rate. If you want to fund your business with a loan, make sure that your credit score is not poor. If it is good, you will likely get a loan approved at attractive interest rates.

·         To improve your credit rating, you should start paying all your debts on time, including utility bills.

·         If you purchase with a credit card, pay off the balance within the grace period. If multiple debts have already trapped you, think of consolidating your loan.

Since you will be paying the debt in fixed installments, your credit score will improve.

If you to get a business loan approved at competitive interest rates, make sure that your current financial condition is sound. Keep the tips mentioned above in mind to get it done smoothly and effectively.