If you’re looking to get approved for a small business loan, you may be feeling a bit overwhelmed. After all, the loan application process can be complex and involves many steps. The good news is that with a bit of preparation and know-how, you can increase your chances of getting approved. Here are ten helpful tips to ensure you get approved for that small business loan.
1) Have A Strong Business Plan
An effective business plan could make or break your loan application. It serves as the cornerstone of convincing lenders that you can support your business idea with actionable steps. Your plan should outline what you intend to use the loan funds for as well as provide details regarding operational expenses, revenue projections and expenses of your company.
Your lender will want to see that your business plan is realistic and has a realistic chance of succeeding, to show they know you have your company’s future in mind when applying for loans. A comprehensive business plan is one way of doing just this.
2) Know What Type Of Loan You’re Applying
As different loans have distinct requirements, it’s essential that you know which loan you’re applying for before proceeding with your application. A common mistake among new business owners is applying for loans that exceed their means.
Consider applying for a larger loan than needed when renovating or purchasing equipment to purchase. Although this might seem appealing, remember that bigger loans are harder to secure approval for.
3) Understand Your Business’s Credit Score
Credit scores are used to assess the riskiness of loans. If your business has a low credit score, your chances of approval decrease substantially. Lenders don’t look at personal credit scores but instead at its counterpart – known as Dun & Bradstreet business credit scores.
Having a low credit score could force your business to pay a higher interest rate on loans, or prevent approval altogether. There are steps that you can take to improve it; among them are making timely payments and keeping outstanding balances low.
4) Show That You’re A Responsible Borrower
Responsible borrowers demonstrate their reliability by repaying loans on time. How can this be achieved? By creating an action plan to repay your loan. In addition, having an excellent credit score and track record when it comes to repaying debts should also help.
Your lender will require that you create a financial statement that describes your current financial status, including cash flow statements, profit and loss statements, balance sheets and more. This document should also show where profits have come from within the business as well as potential areas of improvement.
5) Have A Healthy Cash Flow
As lenders review your loan application, they’ll scrutinize your cash flow to ensure you have enough money to repay their loan on schedule and build trust between lender and business. Healthy cash flows demonstrate your ability to repay their loan on schedule while giving confidence to lenders that your business won’t go bankrupt in the short term.
There are various strategies you can employ to increase your cash flow. From revising operational expenses, increasing revenue or encouraging customers to pay their bills promptly; or asking employees to work commission only contracts – there are many different strategies at your disposal for improving your cash flow.
6) Demonstrate That You’re Using The Loan For A Good Purpose
Your lender wants to see that any funds allocated through your small business loan application are going toward worthwhile purposes; having an effective business plan will demonstrate this fact.
Your business plan should outline the purpose for which the loan will be used. To further demonstrate that it serves a good cause, offering collateral may help. Collateral is something offered as security in case of defaulting on your loan agreement; typically involving real estate, inventory or equipment assets as possible options.
7) Show That You Have A Solid Collateral
An effective business plan and collateral are two methods to demonstrate that your enterprise is legitimate. A comprehensive business plan shows you are serious about your enterprise and have a plan in place for repaying loans; collateral ensures the lender can sell off some assets to recover their loss if you default on them.
How should you decide what collateral to offer when applying for a loan? Your lender will inform you based on the type of loan that best meets your needs and should take into account your business state as an indicator. A healthier organization has higher odds of approval without needing collateral as security.
8) Get All The Necessary Documents
Your lender may require certain documents. They’ll let you know which documents must accompany your loan application. It is crucial that you gather these together promptly and submit them with your loan application.
Your lender will use the documents you submitted with your loan application to verify its accuracy and up-to-dateness, while also using them to assess whether you qualify for a loan.
9) Know The Lender’s Requirements
As you collect documents for a loan application, it’s also a good idea to familiarize yourself with your lender’s requirements. You can do this by reading your loan agreement if approved or speaking to your loan officer; they will help explain what steps must be taken in order to be approved for a loan.
Bear in mind that lenders may alter their requirements depending on the current industry climate. If applying for a loan during times of economic instability, your lender may request additional documents be submitted – this could lengthen the loan approval process considerably.
10) Seek Advice From A Financial Advisor
If you’re experiencing difficulty getting approved for a small business loan, consulting with a financial advisor might be beneficial. They can identify any problems in your application process and suggest solutions; such as improving your credit score or offering different forms of collateral.
Financial advisors can also help identify alternative financing solutions if you’re having difficulty getting approved for loans, and small business loans in particular may prove challenging to obtain. One option would be exploring government grants; there are plenty of them available specifically to entrepreneurs looking to start new companies or fund existing ones.
Also Read- 5 Things To Consider Before Taking Out A Student Loan