For small business owners looking for a small business loan, getting an application approved can seem as confusing as the artifices performed in a magic show. However, the lending process gets easier with the proper preparation and an understanding of the significance of cash flow.
Getting a small business loan isn’t mystic; however, it does require careful preparation and an understanding of how bankers function. Underwriting decisions are based totally on the 5 C’s of credit – capital, collateral, conditions, creditworthiness, and cash flow – and borrowers have to show strength in each.
Here are five ways small business owners can turn a rejection in to an acceptance:
Apply at The Right Bank
Small business loan applications are frequently rejected because the borrowers are trying to find the wrong type of loan, or engage with the wrong lending institution. For instance, a small business that needs cash to fund a new line of business might be turned down for a line of credit because a term loan would be more suitable.
Additionally, applications are often declined because the bank does not lend to your industries, which include loans for hotels. When you are looking for a bank, you need to make sure it surely lends to your industry. In case they don’t, you need to find a lender that does lend to your industry. Applying for the appropriate type of loan from the right type of lender is the first step to getting approved.
Show Your Cash Flow
Most small business loans are rejected due to the fact that bank financiers cannot find satisfactory cash flow to help loan repayments. Documentation starts with three years of corporate and personal tax returns and three years of corporate financial statements; up-to-date financials with prior year comparisons; a debt schedule, such as real estate and equipment leases; accounts receivable and payable reports; as well as inventory report.
With this, the financier will determine how your cash flow compares to the projected debt payments.
Cash flow is normally measured as net income plus interest expense, depreciation, amortization, and non-recurring expenses – such as rent in case you are purchasing property – less distributions. However, understanding your business cash flow may not end there.
Providing additional statistics may be essential to getting loan approval. Start by creating a narrative that allows financiers understand anything that must be taken into account to get the small business loan.
Preparing a business plan with detailed projections is vital in these instances – local Small Business Development Centers and SCORE Association chapters can help. The business plan should document any contracts or agreements that will support the small business loan and provide comprehensive explanation of how the funds will be used.
Strengthen Your Personal Credit
For small business owners, personal credit scores have a major effect on corporate credit worthiness, so strengthening scores in advance of looking for a loan is important. The majority understand that paying late will upset their credit rating; however, the models of credit bureaus have changed at present.
Currently, excessive use of credit card lowers the credit scores affectedly – specifically if it exceeds 50% of the available revolving credit. And, given that many small business owners use their personal credit score for business recurring expenses to take advantage of factors and other advantages.
Determine Your Collateral
Underwriters discount the value of collateral based on the bank’s past experience liquidating loans. Underwriters typically use about 50% of the price of raw materials and finished items inventory, 70-80% of accounts receivable, and 50%-80% of constant property such as equipment, furnishings and office equipment. Businesses grew to become down for inadequate collateral can provide to feature collateral, if possible, or they could seek an SBA-backed loan.
SBA loans are more flexible on collateral when cash flow is enough. Such loans can also have longer terms – up to 10 years as opposed to 5 years with conventional loans – and this can have the added advantage of improving cash flow controls.