It’s all about showing lenders your business is worth the risk.
Small business loans can give your firm the boost it needs to thrive (and sometimes survive), but the approval lies solely with the lender.
However, it is possible to influence your credit score and undertake other crucial steps to improve your odds of qualifying for the loan and securing the funding your firm needs.
This article enumerates tips to help you get your small business loan application approved.
1. Write a rock-solid business plan
Lenders seek clarity on how you intend to utilize their funds and your capacity to repay the loan. A business plan serves as the primary tool for conveying this information.
Create a rock-solid business plan demonstrating your ability to sustain enough cash flow to manage your ongoing business expenses and future loan payments. When a lender can see this information clearly, they will have more confidence in extending your loan.
In this regard, consider including the following elements in the business plan:
- Company overview: Describe your small business and its goals, products, services, and target customer base.
- Market data and strategy: Present research and analysis that illustrates your target audiences’ need for your products and services.
- Marketing and sales plan: Determine how to promote, market, and sell your products and services.
- Sales projections: Explain your pricing structure, existing or potential sales volumes, and the timeline to turn a profit.
- Plan Summary: Describe how you will use the requested funds to acquire new technology, bolster cash flow, or ramp up production.
2. Strengthen your business credit score
A high business credit score can help you secure small business loans and credit more easily and quickly. In addition, maintaining a high business lets you borrow loans at competitive interest rates and terms.
In light of the above, improve your business credit score if you still need to meet the minimum. This entails incorporating good financial habits like establishing strong trade lines with suppliers, paying bills on time, reducing debt, and maintaining cash reserves.
3. Maintain a high daily bank balance
Some business loans are approved based on the borrower’s daily bank balance rather than business income. Also, lenders want to know if you have cash on reserve to make your loan payments. Therefore, managing your daily bank balances and maintaining adequate cash reserves is crucial to strengthen your small business loan application.
4. Organize your financial and legal documents
Gather your financial and legal documents in advance for potential lenders. Different lenders have varying requirements, with traditional banks often needing more paperwork than online lenders. Depending on the type of loan you are applying for, documents that small business lenders may request include:
- Bank statements
- Income and loss statements
- Balance Sheet
- Projected financial statements
- Tax information
- Commercial leases
- Business licenses
- Articles of incorporation
- Lease documents, if applicable
5. Reduce your debt-to-income ratio
Work toward reducing your small business’s debt-to-income ratio as much as possible. This is one of the most essential factors lenders look for while evaluating small business loan applications.
Suppose your debt is too high compared to your business income. In that case, lenders see that as a sign of inability to make your loan installments. On the other hand, a lower debt-to-income ratio demonstrates your ability to manage debt responsibly. It suggests financial stability, making your application more attractive to lenders.
6. Prepare collateral
While only some small business loans require you to provide collateral, the ability to provide collateral can improve your odds of securing the loan. Additionally, having assets to pledge can give you more opportunities to borrow money from various lenders.
The final word
Remember that securing a business loan is a matter of demonstrating creditworthiness and reliability to the lender. If you can show your small business can pay the owed payments on time, your loan application will likely be approved with favorable terms on the first pass.
Want to know more? Since 2006, Escalon has helped thousands of startups get off the ground with our back-office solutions for accounting, bookkeeping, taxes, HR, payroll, insurance, and recruiting — and we can help yours too. Talk to an expert today.