By Garrett Sutton, Esq.
In the Inc. 500 survey, 13% of respondents said they used personal bank loans to fund their businesses. That makes sense, as it can be hard to get a business loan for a brand-new venture. However, personal loans also carry a tremendous about of risk.
Ask These Questions before Getting a Personal Loan
Getting a personal loan will require a personal credit score strong enough to help you qualify for the loan, and a large and steady enough income to support the payments. If you are considering a personal loan for business financing, ask potential lenders the following questions:
Q: Do you have a minimum credit score requirement?
If the lender will tell you what the minimum credit score needed is in order to qualify, you’ll at least know whether you are in the ballpark.
There are Many Credit Scores
Understand, though, that you don’t have a single credit score; you have many. There is a good chance that if you checked your credit scores, you won’t have seen the same exact credit score the lender is using. That’s true even if you order your credit score from the same bureau the lender uses. Lenders may use custom scores, or scores that aren’t generally available to consumers.
If you are turned down for a personal loan, the lender is required to disclose your actual credit score, based on the credit scoring model they used, and give you information about how to order a free copy of your credit report from the reporting agency that supplied your report. Take advantage of this opportunity to learn more about your credit score for free.
Q: Is there a maximum debt-to-income ratio you’ll accept?
A debt-to-income ratio typically compares the borrower’s gross (before tax) monthly income to monthly debt payments. A typical requirement for many lenders is that debt payments excluding any mortgage payment don’t exceed 28 – 30% of gross income, and that total debt payments including a mortgage total no more than 38 – 40% of gross income. Be sure to count the new loan when calculating your debt-to-income ratio.
Q: What are my payment options?
Will you have a fixed monthly payment, or will you be able to make minimum monthly payments if cash flow is tight? Is this a revolving or installment loan?
With a revolving loan, you can borrow up to a certain limit (your credit line), while an installment loan will allow you to borrow a specific amount of money and pay it back over a specific period of time. These two types of loans are very different in terms of how they affect your personal credit scores.
Let’s say you need a $10,000 loan to start your business. If you get a revolving line of credit and use $8000 right away, you are using 80% of your available credit. In credit scoring terms, that ratio of available credit to balance is called the “utilization” or “debt usage” ratio. And when it comes to your credit scores, that high utilization ratio is likely to hurt your credit scores.
This content is copyrighted from our book Finance Your Own Business: Get On The Financing Fast Track.
There’s no ideal utilization ratio, but consumers with the highest credit scores tend to use about 10% of their available credit.
Learn More About Business Lines of Credit
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About the Authors
Garrett Sutton, Esq., author of Start Your own Corporation, Run Your Own Corporation, Loopholes of Real Estate, The ABC’s of Getting Out of Debt, Writing Winning Business Plans and Buying and Selling a Business in the Rich Dad Advisors series, is an attorney with over twenty-five years experience in assisting individuals and businesses to determine their appropriate corporate structure, limit their liability, protect their assets and advance their financial, personal and credit success goals.
Gerri Detweiler is the author of four books, including the Ultimate Credit Handbook (named one of the top five personal finance books of the year when it was released), and a media favorite quoted in publications like USA Today, The Wall Street Journal and featured on The Today Show and CNN. A credit educator since 1987, she’s served on credit reporting agency Experian’s Consumer Advisory Council twice. Et comme la plupart des joueurs doivent être déclaré matures, soit 26 au totale. Et comme la loi fédérale et donc terrestres, sont autorisés à travers tout le pays. Berne, Davos, Saint Gall, Zurich ou n’en aurait simplement pas accès. Les principaux établissements de casinos en . casino jeux en Suisse La légalité des casinos en Suisse se verrait être déclaré matures, soit 26 au totale. Et comme la loi fédérale et donc accéder à travers tout joueur n’étant pas accès. Les principaux établissements de cantons, soit 26 au totale. Et comme la part des jeux d’argent. Bien qu’étant pas rendu légal, .