Small Business Loan Application Tips
Obtaining a small business loan is a big hurdle for many small businesses. It owes to the fact that banks impose stringent lending standards. You have an excellent business idea, a stellar team ready to help you execute your vision, and a no-fail plan. But the lack of outside financing might prevent your entrepreneurial goals from happening.
You will need funds to grow your business and cover daily expenses, including inventory and payroll, which is doable if you can get a small business loan. Although getting approved for small business loans is difficult, it's better to come in prepared and ready. Follow the tips below.
Check Your Credit Score First
Before applying for a small business loan, you need to check your credit score first. Understanding where your credit score stands will help increase your odds of getting approved for a business loan. You can refer to FICO scores and see if your current credit score will qualify for a small business loan.
There's a strong correlation between a FICO score and age when it comes to your eligibility for a particular loan. Thus, be fully aware of both your personal and business credit scores.
Your personal credit score also plays a significant role in your eligibility as a borrower as it will show the lender how you manage your finances and debts. So check your scores and work your way to improve them in case they don't meet the minimum requirements of the lender.
Search for the Right Lender
Small business owners now have broader financing options compared before. Apart from banks, there are many lenders that offer small-business loans. Hence, you need to search for the right one who can help increase your chances of propelling your business forward.
Your options will include:
- National Financial Institutions. You can work with your current bank to get a traditional loan. Since you already have an established relationship, this lender may help put your small business in a better direction if your bank can't help you out.
- Alternative Lenders. With moderate requirements, alternative lenders were able to bridge the gap between community lenders and big banks. Alternative lenders can help secure fast small business loans because they focus more on potential growth than the credit scores of business owners.
- Credit Unions and Community Lenders. Lenders or locally-owned banks that are interested in the economic growth of a certain sector may be a good fit for small businesses that need funding.
Do Your Homework
After searching for the right lender, the next thing to do is find out what are the requirements for their approval process. These requirements might include:
- A robust business plan. Loans are usually not granted to speculating, lending, or gambling ventures.
- Stellar credit history. It includes both business and personal credit history and must be verified by the three major credit bureaus, namely; Experian, Equifax, and TransUnion.
- Strong business and personal assets. It will show the lender that you're capable of repaying them.
- A good relationship with the lender. A positive relationship and communication with your lender, even before applying for the loan, will increase your chances of getting approved.
Pay Attention to Details
It's important to have a clear and detailed business plan that you can show to the lender so they'll trust you and understand your venture. The more details you can provide, the better.
Also, during the application process, it's best if you will talk to them about:
- Why you need the funds and where are you going to use it. If you can give sensible reasons and explain how they can benefit your business, the more they'll impact the lender.
- How each portion of the loan will be utilized. Use updated cash flow projections and financial documentation that were researched by a qualified expert to support your claims. Be prepared also to talk about industry risk, according to government ratings.
Come With the Right Team
The deciding factors for approving a small-business loan aren't only limited your business practices. The lenders also want to:
- Know your leadership. Your executive members should have outstanding business and credit history.
- Find out who are your other investors. You might want to disclose if who else puts faith in your business, and how they're related to you and your business.
- Know if your company has equity. If the lender finds out that you're not personally invested in the business, it will decrease their trust considering the loan distribution. You also need to show compassion when talking with the lenders about your business. If possible, give examples of how you're going to grow your company, whether it's through new product plans or distribution partnerships.
Showcase Your Company's Growth
While both alternative and traditional lenders will look at your business history to gauge your ability to repay that loan and predict what your future will be like, alternative lenders put more weight on your company's growth.
These lenders want to know how your business grew throughout the years, including your victories and downfall. They are looking at the big picture and want to invest in good ideas. That being said, be prepared to tell them your business' story.
Use a Business Loan Calculator
Making sure that you can afford to repay a loan is important because some lenders don't disclose the true cost of the loan during application. You can do so by using a business loan calculator.
You just have to plug the interest rate, APR, and other related fees into a business loan calculator. This will help you determine if the loan offer is right for you, and will give you a general idea about the true cost of the loan.
Have a Plan
The absence of initial and backup plans could get you out of the direction. With that, create a detailed plan for the entire loan application journey. Start by writing a job application and discuss the important things with the bank and so on.
Prepare and plan everything before you apply for a loan. Better yet, communicate with a bank or lender, even if you don't need the money yet. Be present, and don't be afraid to ask questions. Put everything in place until you finally get the loan.
Applying for a small business loan can be taxing. There are a lot of preparations to take care and do that don't even guarantee for approval. But, with these tips, you'll be able to increase your chances of getting approved.
Tiffany Wagner is a content creator and freelance writer for various websites. Besides writing, she also does book reviews. Her favorite genre is whodunit and medical thrillers. When not working, Tiffany cozies ate her favorite coffee shop and read novels.