Borrowing money to start or expand a business is a good way to grow your income, but it can be hard on your credit rating. Borrowing smart can protect your credit rating. Working to keep your interest rate low will reduce your payments and help you keep more of your money in your pocket. Here are some of the factors that affect a loan’s interest rates.
Income
Your bank will want to verify your income before they can give you a loan, and how much you make can affect your interest rate. By checking your income, they can determine if you’re able to make the loan payments without impacting your ability to service other debts. If you have longevity with your employer, make sure to bring that to the attention of the loan officer. You’ll need to bring in copies of your pay stubs, and the bank may also need copies of your individual tax return to verify your income. If you’re looking to expand your business, your length of time in business and balance sheet will be needed.
Credit Rating
There are many factors that can result in your credit rating being lowered. Generally, a better credit rating will get you a lower interest rate on your loan. For example, if you have a poor payment history that has led to debts going to collection, your credit rating will take a hit. A poor credit rating can lead some banks to charge you a higher interest rate to justify the risk. Even if you have an acceptable credit rating, having a high debt-to-income ratio can raise the loan interest rate that a bank offers you.
Collateral
If you take out short-term loans, such as borrowing on a signature loan or a 0% APR card, do your best to turn this unsecured debt into secured debt. Secured debt interest rates are generally lower and tied to collateral. If you don’t have a business that you can tie to collateral, try to put together a business strategy that will demonstrate to the lender exactly how you will use the money and how this investment will help your business to grow. Being able to demonstrate that your business is constantly expanding is a great way to let lenders know that you are a good risk.
Working with a bank you know and trust may give you more flexibility if you find that your payment load is cutting into cash flow. Keep up-to-date with your lender by providing them with tax returns and any other data they request. Doing these things will help to make sure that you can get the best interest rate possible on any loans you want to take out.
