For business owners who are running a small business and are in need of funding, getting a loan application approved is quite a daunting task. However; the process of getting small business loan is a lot simpler with the right preparation and understanding the cash flow importance.
Getting a small business loan is not always enchanted, however it does require detailed preparation and a knowledge of how lenders work. Mostly the small business loan underwriting is mostly based on the 5 C’s of credit. The 5 C’s of credit are capital, collateral, conditions, creditworthiness, and cash flow. And for loan approval, the borrowers must show strength in each.
Here are simple five steps to get your small business loan approved:
1. Apply for Right Loan at Right Lender
Most of the loan applications are declined due to the fact that borrowers are looking for the wrong type of loan, or engage with the wrong lender. For instance, a small business need to lease equipment to carry out their routine operations, and rather than going for equipment leasing program, they apply for small business loan. Business loans are not an appropriate funding option when it comes to leasing equipment. Therefore, consider what type of funding you need for your business and what is the objective of your loan.
2. Show Your Cash Flow
Most loan requests are rejected just because the lenders cannot find enough cash flow to support loan repayments. The paperwork process begins with three years of tax returns (personal and business), three years of corporate financial statements with comparison of previous years, debt schedule list, if any, equipment and land leases, accounts receivable and payables as well as inventory report. By evaluating this information, your lender will determine how your business’ cash flow compares to the projected debt payments.
Your business’ cash flow is usually considered as net profits plus interest expense, depreciation, amortization, and non-recurring expenses such as leasing if you are purchasing real estate, less distributions. However knowing your business’ cash flow may not end there.
Providing additional statistics can be important in getting your small business loan approved. Start the process by creating a narrative that helps your lender know whatever that ought to be taken into consideration to get the small business loan.
Creating a business plan with detailed projections is essential in these cases – local Small Business Development Centers and SCORE can help you in writing one. Your business plan must consist of any contracts that will support the loan and provide an in depth explanation on how the loan amount will be used. A good lender will ask you the right questions that will help you turn your small business loan application into an approvable application; however managing everything will help you.
3. Improve Your Personal Credit
For small business owners, personal credit ratings have a prime impact on corporate credit worthiness, so improving your credit rating before applying for a small business loan is important. Most of the people understand that paying bills late will damage their credit score, but currently the credit bureau models have modified. At present, high levels of credit card usage lowers your credit score – particularly if the use of credit cards exceeds 50% of the available revolving credit. However making your credit card payments before the final date will reduce the utilization and help you in improving your credit score.
4. Estimate Your Collateral
Lenders reduce the value of collateral based on the previous experience liquidating loans. Small business lenders normally use about 50% of the worth of raw materials and finished goods inventory, 70-80% of accounts receivable, and 50-80% of fixed assets consisting of machinery, furniture and office equipment.
- Improve Equity
Small businesses can have too small equity value or too much leverage, particularly when small business owners take out all or most of the cash flow every year. However, prudent modifications on your small business loan application and a planning can change the whole lending picture for you. Some small businesses – mainly seasonal businesses can still find it hard to get funding based on industry and market conditions.