Every small business owner needs money at some point—whether for operational expenses or to benefit from an investment opportunity. Even for business growth and expansion, a little extra cash can make a lot of difference. For most small businesses, it means filling out a business loan application.
For most small business owners, filling out a loan application can be frustrating and time-consuming. According to SmallBizTrends, around 39% of small businesses that apply for business loans from alternative lenders get rejected, though only 1 out of 5 applicants are able to qualify for funding from traditional banks.
To make the loan application process easier and smooth, we’ve have listed 20 proven ways for you to strengthen your business loan application, so you have the best chance of securing the needed funding for your small business.
- Why You Need One
The better you explain the reason for the loan and about your business, the sturdier your business loan application will be. Before making an application, ponder on why you need a loan in the first place and exactly how you’ll use the money.
Do you want to buy the new inventory to fulfill a new order? Do you want to hire new staff? Do you need to invest in an expansion opportunity? Do you want to expand your offerings? Do you need to open a new location? Do you want to refinance your business debt? Do you want to run a new marketing campaign for a new project? Do you want to establish a business credit history rather than using your personal credit for your business?
Irrespective of the reasons, why you need a loan for your business should contribute to your bottom line. You should also explain why your business is worthy of a loan and competitive, too. If you’ve successfully used a loan earlier, talk about how you managed it, and for what purpose along with the repayment. All these little things can make a difference in getting approval from lenders.
- Examine your Credit Scores
You should have absolute knowledge about your business and personal credit scores. You can check your business credit score by requesting a credit report from credit agencies like Experian, Equifax, or Dun & Bradstreet. To check your personal credit score, you can visit Equifax and CreditKarma website free.
A credit score is the major factor lenders consider while evaluating business loan applications. A credit score of 550+ is essential to qualify with most lenders, and above 640 is favored. The credit scores are used to evaluate borrowers’ creditworthiness, as well as the terms of the loan.
According to the State of Online Small Business Lending report, a business owner’s personal credit score carries more value in deciding the loan APR. A frequent check of your credit scores will help you assess your current financial standings and help you prepare early for a business loan application.
Mistakes can happen and credit agency can make that too, IF you find any errors in the report, you’ll need to contact the bureau (or the collection agency) in writing to dispute them in time.
- Pay-Off Existing Debts
Credit scores are determined based on different factors such as the number of accounts you have, the types of accounts, used credit vs. your available credit, the length of your credit history and your payment history.
Your payment history is considered the most influential factor: regardless of you’ve paid your bills on time or not. No matter how good your credit score was, a single late payment can drop your score by up to 100 points.
So, before you apply for a business loan, try as much as you can to pay off your outstanding debts. Awkwardly, they’ll still appear on your credit report, but this will conserve them from damaging your credit score.
- Avoid Liens on Business
Having a lien on your business signifies someone who has a claim on your business assets because you default on their loan. A lien can be a tax lien, which the IRS has placed and the UCC (Uniform Commercial Code) lien, which a lender or a bank has placed.
A tax lien can have a devastating effect on your application because it signifies neither you made timely payment of your business taxes, nor you arrange a payment plan with the IRS. And this means it will be almost impossible for you to secure financing unless you arrange a payment plan with the Internal Revenue Service (IRS). After the payment, the lien will be removed from your credit report.
You might have a UCC lien earlier when you secured a loan from a bank or an alternative lender. Occasionally, businesses might have a UCC lien without even knowing it. It is recommended to have it clear from your report by requesting to your state’s Secretary of State Office.
- Apply When the Business is Doing Well
If your business cash flow fluctuates during the year—maybe you’re in the small landscaping business and get more business during the summer when the services are in high demand—ensure you make an application during or just after when your cash flow is good.
Bank statements are among the prerequisites of a business loan application, and if you apply during a period when the business is slow—the statements won’t demonstrate how good your business has really been doing.
- Describe Personal and Business History
You started with your business info and the reason why you need a loan; have it combined with information about your personal knowledge and learning for the lenders. This could include your diploma, professional associations, licenses, and any professional awards you’ve won over in your career.
You should also describe your business history and its finances. The more details you provide to lenders, the better your chances of being evaluated quickly, since you’re equipping lender with all the essential information to examine your application as well as creditworthiness.
- Consider Legal Assistance
Completing a loan agreement can be confusing with so many complexities involved such as APR, payment and amortization schedule, payment penalties, arbitration terms, grace periods, late fee payments, and questions about your business and personal qualifications. As a borrower, you must provide all such information, and your ability to provide appropriate and complete information can matter in securing the loan or not.
If there’s something you don’t understand, or are uncertain to answer, consider getting assistance from a lawyer to help you with the loan application fine prints. This will not only save you time and trouble but also money in the end.
- Make a Solid Business Plan
Not every lender requires it, but creating a solid business plan can get you a gold star and demonstrates a lender that you are organized, ready, and responsible. This also demonstrates why your business needs a loan and how it benefits your business.
Moreover, it also allows you to provide realistic repayment plans, convincing lenders that you have a strategy in place for loan repayment. The following things should be included in your business plan:
- Executive business summary
- Current and earlier business’s finances
- Sales volumes
- Product lines with prices
- Organization and management team
- Any outstanding debt
- Cash flow analysis
- Competitors analysis
- Strategy and Implementation
- Financial plan and projections
- Be Realistic
Be realistic in your goals as well as in your loan application. Don’t get optimistic about high sales and revenue after securing the loan. The key is to demonstrate stability and that’s what you should do by staying realistic.
Keep in mind that when you secure funding, you’re getting into an agreement with the lender where you’re bound to make timely loan payments over a period of time. Don’t make promises you can’t keep, else you’ll end up hurting your relationship in the long run.
The most effective way to influence the lender with your numbers is to demonstrate a healthy cash flow and that you consistently review your budget to ensure that you are managing expenses and reducing costs when possible.
- Save a Nest Egg
You might be familiar with the phrase; the more the better. The same applies here as well. The more money you have in your business bank account, the better.
Try to save a nests egg for at least three months for operating expenses—including your potential loan payments when you make a loan application. This demonstrates the lender that you’re able to make the payment even if unexpected happens.
- Choose the Realistic Borrowing Amount
Be realistic about how much you need instead of applying for more than you need. In order to make your application a success, it’s imperative to know your cash needs. Don’t guess or ask for too much, crunch the numbers before deciding the loan amount.
Lenders might refuse business loan applications that require small amounts of money because the processing cost is fixed and lenders will make less money from a small loan than they would from a bigger loan.
Lenders will be more willing to work with enthusiastic entrepreneurs that are realistic, responsible and know how much money they need to grow and succeed.
- Calculate Your Monthly Payments
Every lender’s biggest concern is that “can you repay the loan?” If you’re unable to convince the lender, you’re behind the eight balls.
Lenders use the debt-service coverage ratio (DSCR) and the debt-to-income ratio (DTI) to assess whether a borrower is able to afford monthly payments or not. Both ratios demonstrate business affordability and risks.
It’s advisable to calculate your DSCR and DTI scores before making a loan application. Positive ratio scores will help increase your chances of getting approval. The ratio scores will also help you discover your affordability each month—enabling you to be realistic about your borrowing amount.
Stay attentive and always ask questions to your loan officer about the payment schedules, payment methods, and loan fees. This demonstrates that you’re serious about the loan process, and also conveys that you’re thinking every piece cautiously. A sensible borrower is likely to run into unanticipated problems like prepayment fees or hidden charges.
- Collateral Appraisal
If you’re preparing to use collateral to apply for a business loan, it’s constructive to have it independently appraised via a third party. This helps in increasing your chances of approval, securing low-interest rate and more wiggle room.
Generally, the lender will order the appraisal, but Federal regulations state that the appraiser must be neutral and have no direct or indirect interest in the business. The collateral value must meet or surpass the amount remaining on loan in order for a loan to be considered secure.
- Be Patient
Be patient after making a loan application. Higher loans take time to approve. Therefore, if you need quick funding in a day or two, there are lenders that can get you fast business loans, considering your finances meet a certain minimum requirement. On the contrary, if you’re looking to secure the best loan deal, with the lowest interest rates and flexible terms, be patient in terms of weeks or months.
- Leverage Social Media
A presence on social media influences nearly every aspect of life and this includes your loan application as well. A company’s feasibility is closely linked to social media activities, so it shouldn’t be a surprise that social media is an important aspect of the business loan application.
Many online lenders, including few banks, are starting to review business social profiles while making a loan decision, which influences both consumer and business lending
While reviewing social media profiles, lenders take into account different considerations such as your relationship with customers and clients, products/services ratings, and how devoted you’re in your business. It’s also beneficial to pay attention to your social media, even outside the context of a business loan application.
If lenders see what they want to see like quality customer support, positive ratings, commitment to help customers and respond to poor reviews — they consider that your business has good character.
- Select the Right Lender
Searching and finding the right lender plays an important role in business loan approval. There are different lenders offering different kinds of loan products and has different requirements. Some lenders are willing to lend to established businesses, while some to startups. Some are interested in good credit scores, while some consider business revenues. Therefore, before devoting all your efforts into completing a loan application, work on exploring lenders and their lending requirements to understand will you qualify for a loan or not and at what terms.
- Don’t be Afraid to Ask for Extra Help
After all these ways, if you’re still concerned about your loan application or require consultation, don’t be afraid to ask for professional assistance. There are organizations like SBDC and SCORE that offer business advice in all aspects and stages of business, whether you’re just starting or growing your existing business. You can also get assistance from your accountant to have your loan application and financial documentation in order and highlights any potential red flags.
We’ve covered eighteen proven ways to help your business loan application succeed. By optimizing your business loan application and understanding exact lenders’ requirements, you considerably increase your chances of getting quick approval on your loan application.