5 Tips on Applying for a Small Business Loan
A small business loan is essential to increase your working capital, cover cash flow gaps and purchase equipment and tools for growth and expansion. Although intended for startups and businesses with limited budgets, not all get approved for a small business loan.
Increase your chances of approval for a small business loan with these five tips:
1. Build good personal and business credit scores
Good credit scores reflect your creditworthiness or trustworthiness in making repayments and managing finances.
Build and maintain good credit scores by paying your bills on time and avoiding late payments, charge-offs, foreclosure and bankruptcy. As much as possible, apply for one loan at a time to avoid making several loan inquiries, which can negatively affect your credit rating.
The most commonly used personal credit scoring model in lending decisions is the FICO score, which is derived by the Fair Isaac Corporation. It is based on five factors:
- Payment history (35%)
- Amounts owed on credit cards and other debt (30%)
- Average length of credit (15%)
- Types of credit in use (10%)
- Recent credit inquiries (10%)
Aside from your personal credit score, your business’ credit score is also assessed through your business credit card.
A credit score that’s considered good for personal credit is at least 650 (with 850 as the highest) and between 80 and 100 (the highest) for business credit.
2. Provide collateral
The collateral is any of your asset or property that serves as a backup in exchange for the loan. It can be taken and sold by the lender when you default on the loan repayments.
If your credit score is relatively fair, provide collateral to increase your chances of getting approved for a small business loan. This will ensure the lender of full or partial compensation for any outstanding balance. It will also prove your commitment to repay the loan.
Aside from increasing your odds for approval, you can also get a small business loan with a lower interest rate and more favourable terms.
3. Improve your business cash flow
Lenders usually check your business’ cash flow before deciding on whether or not they grant the loan. The cash flow also affects the loan amount and terms. This is particularly true for those that loan smaller amounts of money and those that do not require collateral.
By examining your business cash flow, including past tax returns and existing debts, they can assess if your business has sufficient funds to make monthly repayments.
Improve your business cash flow by expanding your sales market, increasing the prices of your products or services, requiring your customers to pay in cash, paying vendors on time, improving your inventory, sending out invoices immediately, and paying vendors on time.
4. Present detailed business and financial plans
Detailed business plan and projections, especially if you have a startup business, can help the lender assess whether it is viable and profitable. You can also demonstrate how the loan can help you execute your business plan and how you intend to use the money.
When presenting your business and financial plans with a lender, be honest and direct. Talk about how the loan can help your business grow. This will help get you both on the same page.
Never paint a less-than-truthful image of your company or fake the numbers. Your lender may uncover it during the background check, hurting your chances of approval and compromising the integrity of your business.
5. Process the application efficiently
Fill out the application accurately and truthfully. See to it that everything in the application form is truthful and consistent, including the business name, address, contact number and website address. Consistency is very important in filling out any small business loan application. Typos and mismatched information can become reasons for denials.
Do not forget to prepare all the necessary documents. Traditional lenders require many financial and legal documents, which can be time-consuming to gather. If you need the money faster, go to online lenders, like Positive Lending Solutions, which can help you find the right small business loans with less restrictive criteria and fewer requirements.
At Positive Lending Solutions, our entire application process is handled online. Call 1300 722 210 to talk to one of our loan specialists. You can also fill out our Quick Quote form. We’ll get back to you within 5 minutes during business hours.