Running a successful business is a major achievement for any entrepreneur. One needs to look after the daily operation of the business, sales, purchase, payrolls, procurement, and most important, the cash flows.
Managing the cash flow of the company is extremely important because if there are gaps in the cash flow, they can seriously impair your ability to run your business in an orderly manner.
Sometimes, businesses are required to obtain loans from banks in order to fill cash flow gaps. One of the most sought-after borrowings is known as an unsecured business loan.
There are five factors that would make you qualify for an unsecured loan. They are listed as follows:
1.Credit Report or Credit History
Banks, financial institutions and other lenders are most interested in your past credit history, which is generally measured through your credit score.
Before even applying for a loan, you should request copies of your credit report from a reputable agency. The report is associated with your own social security number. The credit report of your business is associated with the Tax Identification Number.
After having a copy of the documents, carry out a brief review, find discrepancies (if any), and try to have them resolved. Start the application process only after you have resolved it and revised it thoroughly.
Note that no bank, financial institution, or a lender will approve you a loan if you fail in this very basic requirement for loan procurement.
2.Steady Income and Repayment Ability:
A bank or a financial Institution is putting its money at stake. Consequently, they want to be extremely cautious about whether you will be able to repay them.
It can be ascertained through your cash flow history and your future business projections. They are also interested in knowing about your personal assets.
If your business has shown continuous profits for the past three years or more, they will assume that it will continue to make profits in the coming days. This belief can be further re-enforced through future projections.
Your balance sheet will provide them with a view into the health of your business, and whether it has the ability to weather minor storms in the future.
But most of all, they are interested in your cash flows. If you have been managing your cash flows efficiently for the past few years, it will give them the satisfaction that you will have sufficient money to make regular repayments.
Banks and Financial Institutions are investing their own money in your business. It means that they want to see you becoming successful.
However, before they invest their money, they want to make sure that you – as the owner of the business – have also invested a reasonable amount in the venture.
It makes them understand that you have also taken risk with your own money, and they success or failure of the business will affect you directly.
Moreover, if a business has more equity, it has more chances of becoming successful compared with another business that has very weak equity.
Strong equity means that you can take care of regular bumps in the economic cycle, and will not be hampered at the first sign of crisis.
4.Adequate Working capital
Working capital is the difference between the current assets of the business and its current liabilities. Cash in hand is also deemed as working capital plus whatever the business has readily available for setting off current liabilities.
Current liabilities would include payable invoices, utility bills, rent, rates and taxes, and any other thing that needs to be paid immediately.
If you don’t have adequate working capital available with the business, there is a possibility that you will default on your liabilities, and eventually fail.
In such a scenario, no lender or bank will be willing to offer you unsecured financing.
5.Number of Years in Business
Banks and financial institutions are highly professionals in their industry. Consequently, they want to work with people who are professionals, skilled and experienced.
There is not a lender who will bet his money on an inexperienced client. The number of years you have been in the business will allow the lender to guage your experience with the business, and whether you have the ability to continue to run it successfully in the future.
However, it is not only the number of years that you have spent running the business, but you also need to show them that you have good managerial skills, and their money is safe in your hands.
If you see it from the perspective of the lender, you will be able to comprehend more easily. If it was your money at stake, you will want to put it in the hands of a person where it will be exposed to a lesser risk.
The banks and lending institutions think in the same manner. They avoid working with an inexperienced person because such a person amplifies their risk of losing their investment.
The Final Word
Seeking a loan from a financial institution is not a bad thing for business. It happens in the normal course of business, and almost every business must have secured one kind of financing, or the other from a lender at stome stage.
However, it is up to the owner to analyze which financing will suit the business best and how they will manage to repay it without causing extra burden on their cash flow.
Unsecured financing is a good option simply because you don’t need to put up collateral. If you take care of the factors mentioned above, you have every chance of securing this kind of loan.