When applying for a business loan, lenders will consider a number of different indicators of your creditworthiness. Because hard credit pulls can make it harder to get approved in the near-term future, it is important to make an informed decision when deciding how to apply for a small business loan. While the requirements will be different for every lender and loan type, there are many ways to improve your chances of getting approved. Here are some of the most common methods business owners use during the application process.
1) Making an honest assessment of your credit score
Your credit score will heavily influence most lenders decision to give you a business loan. Even though the loan is for your business, both your personal credit score and business credit will be taken into account. You should make an honest assessment of your credit score, to better understand what types of loan you would qualify for and the expected interest rates. If the interest rate is too expensive to service, then you should seek out other sources of financing that work better for your business.
2) Planning ahead
An intrinsic and critical part of running your business is having a plan for the future. Understanding your financing needs in advance of the need being pressing will help you on many levels.
First, you will not be forced into taking short term loans with high interest rates. This will allow you to avoid damaging cash flows and obtain lower cost long term loans.
Second, by having the initial financing you need to take advantage of growth opportunities, your company’s cash flows will not be threatened.
Third, most businesses’ revenues fluctuate throughout times of the year. Lenders want to see improving revenues, so knowing when your revenue will peak and seeking financing during these time will be a strategic move to improve your chances of getting a loan.
3) Having organized documentation
At the end of the day, the lender will make a decision on your creditworthiness. While the numbers have to check out, having an organized presentation can help your chances of approval. If you show your accounting processes are methodical and well represent your work, this gives the lender qualitative data about how you run your business. In addition, the lender is a human, making their life easier will not go unnoticed.
4) Having room for more debt servicing costs in financial statements
If you are currently making payments in your personal or business accounts and have room to pay off more debt, lenders will see this as proof that you will be able to pay back the loan. Lenders want to offer more loans, but only to people they trust will be able to pay them back. Seeing your current payments and knowing that you have the capability to pay more will allow lenders to be more comfortable approving your loan.
5) Applying during a period of increasing profitability
The time to seek out a loan is during your most profiting months. Lenders want to see growing revenues in the recent past, in order to have confidence that you will continue to grow. While there are certain circumstances mostly out of your control, it is normally possible to forecast cash flows and get your company capitalized while cash flows are strong. This is particularly important for seasonal businesses and companies with a small number of customers who order high volume on a somewhat unpredictable basis.
6) Having a clear handle on future growth opportunities
Just like an equity investor, the lender will want to see a compelling and realistic case for the future of the business. Not only will this reassure the lender that you will be able to service the loan, it can excite them about growing their relationship with you. Many lenders like to grow their relationships with their clients, and give access to more credit over time. As you build a working relationship and deliver on your growth plans, they can lend more capital without spending on customer acquisition and further due diligence costs. Prior to seeking capital, come up with a defined plan for allocation and understand how you will deploy capital to deliver on those initiatives.
7) Applying to lenders that have not declined you in the last 12 months
There are many lenders that cover similar spaces and will lend to similar parameters. If you get declined, they will see it on your file and be more likely to decline you again. This can ding your credit score and inhibit your ability to get loans elsewhere. Instead, you should connect with an online advisor that will help you navigate your options without hurting your credit score.
8) Using business credit cards instead of personal credit cards
Many business owners, particular in early stages of their business, facilitate working capital using personal credit cards. However, there are several disadvantages to this, which include making it more difficult to secure a loan (30% of your FICO score is based on your debit to credit ratio). Instead, try to separate your business liabilities from your personal by setting up a formal legal entity and applying for a business credit card.
What to do if you were declined for a loan
If you are declined from a loan, be sure to get clear feedback on why you were declined. Most lenders are happy to provide you this detail, as it is to their benefit if you can correct the issue and come back as a strong lending candidate. Just like you want to grow your customer base, banks are looking to grow as well. However, they have underwriting standards that their management team and shareholders expect of them. Business is always unpredictable, but being prepared and knowing your options can help you secure a loan.