Disclaimer: Information in the Business Financing Blog is provided for general information only, does not constitute financial advice, and does not necessarily describe Biz2Credit commercial financing products. In fact, information in the Business Financing Blog often covers financial products that Biz2Credit does not currently offer.
When you need capital, getting a loan can be the thing that makes or breaks your small business. Whether you’re looking to expand your operations, purchase new equipment, or manage cash flow, having access to additional capital can provide the boost your business needs. Unfortunately, the fact that you need money doesn’t mean that a traditional bank or financial institution is going to loan you some—28% of business loan applicants are rejected or only partially approved. In order to receive financing, you need to show them that your business is sound, that your future is secure, and that you will be able to pay back the money they lend you with interest. And the way that you prove this to them is through a detailed loan application. In this article, we’ll walk you through the tactics and tips that can help you navigate the loan application process and increase your changes of timely approval.
3 Key Takeaways
- Understand what lenders are looking for in a loan application to better position your business for approval.
- Prepare all necessary documents thoroughly and ensure your credit score is in good standing before applying.
- Tailor your application to the specific requirements of the loan type you are seeking to improve your chances of securing the best possible terms.
Types of Small Business Loans
There are several types of loans available for entrepreneurs and small business owners, each designed to help with different areas of your business. Understanding what the options are can help you choose the right financing for your situation.
- Term Loans: Term loans are one of the most common types of small business financing. With a term loan, you receive a lump sum of money upfront that you then repay with interest over a fixed period of time, typically a few years. These loans are perfect for large, one-time investments like buying equipment, expanding your product line, or buying out a competitor. The structured repayment schedule allows for predictable budgeting, but it’s crucial to ensure that your cash flow can support the regular payments.
- SBA Loans: Small Business Administration (SBA) loans are similar to traditional term loans, except that they are backed by the U.S. SBA, reducing the risk of default for lenders. As a result, they have better interest rates and terms, but at the same time, typically take longer to be approved because they come with more requirements and red tape.
- Commercial Real Estate (CRE) Loans: If you’re planning to purchase or refinance commercial property, CRE loans may be the option for you. These loans allow you to purchase real estate or buildings using the financed property as collateral for the loan. And because the collateral is so strong, you can typically secure low interest rates and favorable terms. That being said, any property that you finance must meet minimum appraisal standards, so getting the loan approved may take longer and be more complex than other types of loans.
- Revenue-Based Financing: This type of financing is not a loan, but allows you to repay what you borrow based on a percentage of your business’s revenue. It’s a flexible option, especially if your income fluctuates, meaning that you’ll pay less when your revenue is down and more when it goes up. The downside is that revenue based financing comes with higher interest rates, and the total repayment amount can vary depending on your business’s performance.
- Business Lines of Credit (LOC): Also not a loan, a business line of credit is like a credit card without the plastic. You’ll be approved for a maximum amount of credit that you can then draw on as needed, only paying interest on what you use. This makes it a great option for managing cash flow, covering short-term expenses, or addressing unexpected costs. LOCs can be revolving, meaning you can continue to borrow as long as you don’t exceed your credit limit, making them a versatile tool for small businesses.
What Are Banks Looking for When Reviewing a Business Loan Application?
The key factors banks are looking for in your application are referred to as the “5 C’s of credit” and include character, capacity, capital, collateral, and conditions.
- Character: Lenders want to see that you are a responsible borrower, so will check your credit history, looking to see if you have a history of making debt payments on time. If you’re a startup or new business owner, having a good personal credit score can also help.
- Capacity: Capacity measures your ability to repay the loan. Lenders will closely examine your business’s cash flow, revenue, and existing debt obligations to determine if you have sufficient income to cover the loan payments. If your business has been showing consistent cash flow for years and you can demonstrate solid financial performance, it will help you convince lenders that you are able to take on additional debt.
- Capital: Capital refers to the amount of money you’ve personally invested in your business. If you’ve self-financed your business, it shows investors that you’re highly committed to its success and that you’re confident in the direction it’s headed. Lenders like to see this, and will be more willing to offer you financing because you have skin in the game.
- Collateral: Collateral refers to assets that you pledge as security for the loan, including business assets, real estate, equipment, or inventory. Collateral reduces the lender’s risk because it provides a way to recover their money if you default on the loan. If you don’t have a very strong application, offering up more collateral may be enough to get the lender to still offer you financing.
- Conditions: Conditions include the overall economic environment, industry trends, and how you plan to use the loan. Lenders will consider how external factors might impact your business’s ability to repay the loan, and they will want to know how the loan will help you improve your business over the coming months and years, as this will be key to your ability to repay them.
How Can You Prepare for a Business Loan Application?
- Educate Yourself: You’ll want to know everything you can about the different types of loan that are available and the various requirements that each has, since not all loans are suitable for every situation. Do a deep dive on the loan options already mentioned to find the one that best fits your business needs. For instance, if you’re looking for a loan with predictable payments, a term loan might be the best option, but if you need flexible cash that you can draw on as needed, a business line of credit might be the thing for you.
- Decide How Much You Actually Need: Business financing isn’t free money–you’ll have to pay back the loan amount that you receive, plus interest. So make sure you don’t take out more than you need; there needs to be a clear path to ROI. At the same time, you don’t want to borrow too little. If your financing doesn’t actually cover your business need, you’ll be digging yourself into a hole with no way out. Carefully evaluate your business goals, calculate the amount of financing you need to achieve them, and check that your projected cash flow can support the repayment terms.
- Improve Your Credit: Your credit history plays a big part in being approved for a loan. If you don’t have great credit, start working on improving it as soon as you can, as it can be a drawn out process. If you need to build stronger credit, work on paying off existing debt, making loan and credit payments on time, and be sure to avoid opening any new accounts before submitting your loan application. If you’re a fairly new business, a good personal credit score may help you secure a loan in lieu of business credit history.
- Prepare Key Financial Documents: Lenders will require detailed financial information to assess your business’s financial health, including your balance sheet, income statement, cash flow statement, and tax returns. Ensure these documents are up-to-date and accurately reflect your business’s financial situation. Having well-prepared financial statements can demonstrate to lenders that you have a solid understanding of your business’s finances and are capable of managing a loan.
- Build a Strong Business Plan: A well-crafted business plan is essential for securing a loan. Your business plan tells the narrative of what your company does, who it serves, and where you’d like it to be over the next few years. A strong business plan not only helps convince lenders of your business’s potential but also serves as a roadmap for your business’s future growth.
Tips for Getting Your Business Loan Approved
Once you’ve completed the initial steps in preparing your business loan application, it’s time to focus on strategies that will enhance your chances of approval. Here are a few tips that can help you secure the small business financing you need:
- Showcase Your Cash Flow Management: Banks need to see that your business earns enough cash to cover the loan repayments and your regular expenses. Your application needs to show that you know how to manage cash flow, so be sure to include historical financial data and future projections.
- Emphasize Your Business’s Strengths: Every business has unique strengths that set it apart from the competition. Whether it’s a loyal customer base, a strong market position, or innovative products, make sure to highlight these strengths in your loan application. Highlight your competitive advantage as a way of helping lenders understand why offering you financing is a good investment.
- Be Transparent About Risks: While it might be tempting to downplay risks your business might face in your loan application, transparency is key to building trust with lenders. Acknowledge any challenges your business faces and outline the strategies you’ve implemented to mitigate these risks. Whether it’s addressing industry-specific risks, economic factors, or competition, showing that you have a clear plan for managing potential issues can reassure lenders that you’re prepared for any scenario.
- Tailor Your Application to the Lender’s Requirements: Different lenders have different criteria for approving loans. Some may prioritize your credit score, while others may focus on your business’s cash flow or collateral. Before submitting your application, research the specific requirements of the lender you’re applying to and tailor your application accordingly. For example, if the lender places a high emphasis on credit history, make sure your credit report is accurate and highlight any improvements you’ve made to your credit score.
- Explain How You Plan to Repay the Loan: Lenders don’t just want to know how you will use the loan, they also want to know how you’ll repay it. Be sure to include detailed financial projections, sales forecasts, and cash flow predictions that include your loan payments.
Conclusion
Securing a loan can feel like a big step if it’s your first time using business financing. But you’re not alone. Over 40% of small businesses in the U.S. applied for financing last year, and with good reason. Business financing can give you a leg up on your competitors and help you break through in the noise marketplace to reach more customers. To have your best chance at getting the financing you need, make sure your application is thorough, tailor your application to meet lender requirements, and double check every detail before submitting. Focus on building a strong financial foundation, maintaining good credit, and presenting a compelling business plan that showcases your business’s strengths and growth potential.
FAQ Questions
- What do I need to do to apply for a small business loan?
Recommended steps include:1) educate yourself about financing options, 2) figure out how much you need to achieve your goals, 3) prepare your financial documents, and 4) write a clear business plan.
- What are banks looking for when reviewing business loan applications?
Lenders are looking for a strong business plan, a healthy credit history, collateral to secure the loan, and a clear path to ROI for your business.
- What financial documents are required for a business loan application?
Commonly required documents include your business’s balance sheet, income statement, cash flow statement, tax returns, bank statements, and a detailed business plan with financial projections.
- What are the top ways to increase the chances of approval for a business loan?
Improve your credit score, provide accurate and detailed financial information, tailor your application to the lender’s specific requirements, and clearly outline how you plan to use the loan and repay it.
- What are the costs and fees for a small business loan?
Fees and costs will vary depending on who your lender is and whether they are a traditional bank, credit union, or online lender. It’s essential to understand these costs upfront and factor them into your financial planning.
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