Cash flow is essential in business to ensure operations run seamlessly. Unfortunately, not all companies have enough capital to operate and invest in new equipment for expansion. This is where business loans come in handy.
Nothing can match an entrepreneur’s joy more than receiving the news that their business has been approved for a loan. For one, getting a loan is a challenging feat. This is especially true for bank loans, as you must submit many documents for approval. The verification process takes some time, after which you may be granted the loan or disqualified. Thus, you’d want to do everything possible to raise your chances of securing funding.
As a business owner, the last thing you’d want is to receive the bad news that you didn’t qualify for a business loan. For this reason, increasing your chances of getting approved for a loan should be a top priority. Here’s what to do to increase the odds of getting approved for a business loan.
1. Improve Your Credit Score
Your credit score is a significant concern for most lenders. They’d want to be sure they won’t lose their money by lending it to you. As such, a poor credit score can be one of the reasons for getting disqualified for a loan. It implies that you haven’t been paying debts on time or have several loans in your name. This doesn’t reassure the lenders that you’ll make your repayments. Thus, they might deny you cash because of the high risks involved.
Some lenders, such as banks, will check your personal and business credit score. Hence, this is why it helps to keep up with debt repayment in your business and personal life.
Reviewing your credit score before applying for a loan puts you ahead. Instead of hoping your lender doesn’t find out about your poor credit, it’d be best to work on improving it. Here are some tips that help you improve a poor credit score:
- Clear outstanding debts
- Open multiple credit accounts
- Remove late items with the relevant credit bureau
- Reduce debt ratio
- Pay your bills on time
Remember, the minimum credit score varies from lender to lender. On average, banks consider a minimum of 600, while other lenders are more lenient and can accept scores as low as 500. However, aim at excellent credit scores of 740 and above, approaching 800. It’s an added advantage for your business regarding financing.
Small and medium enterprises (SMEs) account for most of the business globally, and you’re probably running a similar firm. Notably, competition for loans is also rife among these companies. Therefore, if you’re looking into applying for business loans for SME, ensure your credit score puts you in a better position for the loan request to be approved.
On the other hand, no credit history isn’t good at all. It lowers the investor’s trust in you. As such, look for a way to build your credit score.
2. Choose the Most Appropriate Lender
There are several business loan sources to consider. However, identifying the most appropriate lender for your business increases the chances of getting your loan application approved.
Several factors determine the right lender. For instance, consider a quick lending option if you need the money urgently. A bank wouldn’t be the most convenient option. In such a case, you can consider online lenders who only require a few documents, such as your transaction receipts, and voilà! You can get your loan approved in two or three business days.
On the other hand, identifying the best loan for your business is essential. These are some of the typical business loans:
- Small Business Administration Loans (SBA)
- Long and short-term loans
- Startup loans
- Business lines of credit
- Merchant cash loan advances
- Capital loans
Since there are many financing options, identifying the correct type of loan for your business ensures you have a better chance of your lender approving the loan request. Consider some factors, such as interest rates, requirements, and the repayment period as you choose your loan. That way, you won’t be a victim of circumstances if you can’t pay the loan within the agreed timelines. Remember, one lousy record lowers your chances of being approved for the next loan.
3. Organize Your Business Documents
You can speed up the application and approval process by having all the documents ready. It shows the lender you’re prepared to start the process and get the loan. Additionally, if your business is a partnership, it’d be best to have all the partners sign an agreement to show they’re part of the loan. It helps reduce the time you’d spend looking for them to sign the loan request or application form, especially if they reside in different locations.
One of the critical requirements that you must produce for your request to be approved is business documents. However, note that the required documents vary significantly from lender to lender. Some of the most commonly required documents include the following:
- Identity proof
- Address proof
- Bank statements
- Balance sheet
- Profit and loss account
- Tax filing documents
- Business and personal credit scores
- Sole proprietorship declaration
- Copy of memorandum and articles of association
Having all the documents with you as you approach a lender is crucial in getting your loan approved quickly.
4. Create a Solid Business Plan
A business plan is a crucial document when looking for external financing. It should display your projected growth and operations strategies. The lenders want to find out how you intend to spend the money and its impact on your business. Thus, a well-written business plan when applying for a loan is a winning strategy to increase the chances of the loan getting approved.
Some of the key features to include in your business plan are:
- An executive summary: It gives an overview of your goals and how you intend to get there.
- Company description: It outlines how your business fulfills customer needs.
- Market analysis: This contains information about your target market and competitors.
- Financial projections: These include business statements such as balance sheets and profit and loss accounts and how much revenue you project to generate.
- Management: You must clearly outline who owns the business and the business structure.
Ensure you draft a well-written business plan since it acts as the blueprint for your business. Having one helps you clear the roadblocks for the funding.
5. Give a Detailed Plan on How You Will Spend the Money
Having a specific purpose as to why you need the loan gives your lender a good picture of how you’ll use the money. A concrete spending plan also sheds some light on your repayment plans. For instance, if you want to expand your business, you must tell your lender that you’ve found a new location you’d like to explore.
One of the most innovative ways to use the loan would be on inventory purchases or capital assets. Lenders prefer funding businesses investing in assets since they’re more likely to generate income. While at it, stipulate how much you expect to put into developing the product and marketing versus how much returns you expect to make from its sales.
It’s also vital to elaborate on the sales follow-up techniques you intend to use. If the numbers add up, the lender will have more faith in your project and will have no doubts you’ll put the money to good use.
6. Manage Your Cash Flow
The easiest way to lure the lender to your side is by proof of good cash flow management. For a seasonal business, apply for a loan when your business is making huge profits. The numbers will reflect a healthy company.
Cash flow influences your eligibility for a loan. It’s the difference between the opening amount and the closing balance. If it’s positive, it’s good for your business, as lenders interpret it to mean a well-performing company. Your lender is also interested in the liquidity position of your business. It helps them understand your debt service coverage ratio.
In other words, it shows how you plan on servicing the debt. As such, it’s vital to have the figures reflect that. Here are some tips to help improve your cash flow management:
- Reducing overhead costs
- Eliminating unnecessary expenditure
- Maintain accurate accounting records
- Paying your bills on time
Since cash flow is one-way lenders measure your business’s health, you should ensure it remains positive at every close of business.
7. Have a Repayment Plan
Even after increasing your chances and qualifying for the loan, the end game is how you intend to pay the loan. Your loan repayment strategy seals or breaks the deal. Thus, having a solid repayment strategy is critical to getting your loan request approved. Besides convincing the lender you qualify for the loan, you ought to prove you can repay it.
On that note, you’d want to have one of your financial collaterals, such as capital assets, ready for auction in case of a worst-case scenario. The lenders will prefer businesses with securities to minimize the risk if you fail to repay the loan. Instead of empty promises, a concrete repayment strategy increases your eligibility for a loan.
Getting a business loan isn’t a walk in the park. As such, it’d pay to put in the work that increases your chances of getting the request approved. Plan appropriately for the loan application and get everything in order. Don’t forget to be transparent with your figures. Emphasize your repayment plan, as it builds trust and confidence with your lenders and assures them you’re the right pick for the loan.