If you’re researching business loans, you’re probably interested in ways to streamline the process and boost your chances of getting approved. A business loan could help take your company to the next level—whether that’s hiring employees, investing in marketing, purchasing another company, or anything else that propels your business forward.
Think of this as your “business loans made easy” guide. We’ll look at some of the things lenders take into account when reviewing applications so you’re prepped and ready to get approved.
What Lenders Care About
Every lender has slightly different criteria when reviewing loan applications, but most will generally consider these elements.
Credit Score
Your credit score tells the story of your history with credit products. A high score indicates you’ve handled the accounts well, with no (or few) late payments or derogatory marks. This signals to a lender that you’re more likely to be able to repay money you borrow.
While everyone has a personal credit score, companies may also have a business credit score. If you’ve never taken out a business loan or business credit card, your business financial history may be scant. In that case, lenders will look only at your personal credit scores and history.
If you want to separate your business finances from your personal credit, you can apply for a PAYDEX score: a numeric indicator of the past payment performance of your business. Paying bills on time may increase your score. Some, but not all, lenders reference PAYDEX when reviewing loan applications.
Financial Statements
Many lenders will ask for financial statements, such as your company’s profit-and-loss statement or sales records. This helps them understand your cash flow and whether or not you can afford to pay back financing.
Business Plan
Some lenders may ask to see your business plan, especially if you’re applying for a larger amount or for an SBA loan. Your business plan details your vision for your company and the spending budget for loan proceeds, both of which help a lender decide whether to grant you a loan or not.
Collateral
Some lenders require an asset you can put up to secure the loan. If you can’t pay off the loan, your asset could be liquidated (sold) to cover your debt. For an equipment loan, the equipment is typically the collateral.
Not all lenders or loans ask for collateral, but some do. Loans over $50,000 from the SBA do require collateral, and the SBA may put a lien on your house.
Prepare Your Application
Now that you know the criteria lenders examine, let’s look at what you need to get ready to apply for a loan. First, find out what the lender you’ve chosen asks for with an application, as each has its specific requirements.
Create a Budget
Lenders may not ask for this, but a budget for how you intend to spend the money is helpful so you borrow just enough without overextending yourself financially. It also ensures you have a plan for how every dollar will be spent.
Gather Your Documents
You’ll need to gather any documents the lender requires, which may include business and/or personal tax returns for the last several years, financial statements like profit-and-loss statements, and so on.
Update Your Business Plan
Again, not every lender asks for a business plan, but if yours does, review and update it as needed.
Boost Your Odds of Getting Approved
Here are a few strategies to make your application shine.
Build Your Credit
If you don’t have business credit, you can work on building it before applying for a business loan. Consider applying for a PAYDEX account so all your business financial transactions are tracked. Take out a business credit card, use it, and pay your bill on time each month. Pay your vendors on time.
For your personal credit, pay down existing debts to reduce your debt-to-income ratio. And, just like with your business credit, pay your bills on time each month. It’s also a good idea to review your credit report to ensure it’s updated and has no errors.
Manage Your Cash Flow
Being able to demonstrate healthy cash flow for your business is key to getting a business loan. Lenders are less eager to give money to a business that’s struggling and may be unable to pay back the loan. You want to be able to show a thriving business through updated financial records, and that borrowing money will help your business succeed even more.
Reduce Debt
If you have outstanding debt, either for your business or yourself personally, consider paying it down. Doing so may increase your credit scores, and it will free up funds for you to repay a loan.
Choosing the Right Lender
Just as important as preparing your business to get approved is finding the perfect fit in a lender. There are many types of lenders, each with their own focus and types of loans available.
As you shop for a lender, compare loan products, rates, and terms, as you may be able to save substantially if you find the right lender.
Traditional Banks vs. Online-Only Lenders
These days, just about any lender or bank can be found online, though some traditional banks may require you to complete your application at a branch. You can typically find SBA loans with both traditional banks and credit unions, as well as online-only lenders.
Specialized Lenders for Small Businesses
Some lenders focus on small businesses and may have criteria that are easier for entrepreneurs to qualify for.
Tips for a Successful Loan Application
Here are more tips to help you maximize your chances of approval for a business loan.
Prepping Is Essential
It’s worth it to take the time to make sure your application is filled out correctly. Instead of waiting until the last minute, review the application process ahead of time to ensure you have everything you need. Your application could be delayed if an underwriter contacts you for more information.
Avoid These Red Flags
Some things will immediately send an application into the review queue, including:
- Lack of business or personal credit
- Missing information in the application
- Your business is new
- Negative cash flow
- No collateral
Seek Professional Help
It may be helpful to get professional assistance when you apply for a business loan. Organizations like SCORE and the SBA offer free help in preparing your application. Also, talk to a lender to understand what financial products are best for you. Bear in mind they may be inclined to strongly recommend their own offerings.
Alternative Financing Options
As well as business loans from banks, credit unions, and online lenders, you have other options for financing.
- Microloans: Available for smaller amounts, like under $50,000.
- Business Grants: Funding that doesn’t have to be paid back.
- Crowdfunding: Funds raised from anyone who wants to support your business.
Business loans exist for nearly every type of business with every sort of financial history, but taking the time to improve your credit and financial situation could open the door to more financing options.
