5 Ways Small Businesses Can Get Their Business Loan Approved

When small businesses apply for a loan, the money is usually intended for either one of two reasons: free up cash flow or financing growth. Both of these are aspects that any size business should think about on a daily basis. However, managing cash flow and growth is especially important if you are a small business.

Unlike large corporations, small businesses don’t have the track record to get advances from banks at the drop of the hat.  They don’t have their connections to the lenders like larger corporations tend to have. For the typical small business, loan applications are a tedious, frustrating and nail-biting exercise in which there is no guarantee of a positive income.

For a personal loan, your credit score can make or break your application. For business loans, the lender must be convinced that what the borrower intends to use the money for is something that will generate the income required to comfortably pay back the loan. The better prepared you are before filing the application, the higher the chances of a positive response from the bank.

The following tips can help make it easier for your loan to be approved.

Source: Pixabay

  1. Find the Right Loan

One of the main reasons business loans are declined is because the borrower either approached the wrong lender or sought the wrong type of loan.

We often look at banks and other lenders as a monolith. It’s true that credit is undergirded by a core set of principles. However, the specific application of these principles are not the same across lenders. That’s why there are differences in interest rates, application fees and maximum loan terms.

Also, some banks have made a decision not to lend to certain industries. Finding out whether a lender serves your niche should be one of the first things you do.

You can identify the right lender but apply for the wrong type of loan, so be careful. Establish what loans your business qualifies for and the one that will deliver best value.

  1. Demonstrate Good Cash Flow

Cash is the lifeblood of a business. History is full of companies that were profitable on paper but collapsed following a scarcity of cash.

Some of the best examples of the cash flow’s persuasive power is in the tech industry. Here, new companies go for years without making money but are still able to obtain loans. That’s because the investors and lenders agree that whereas the business may not be profitable at that point, it’s generating enough cash to pay off the loan and is likely to break even in future.

To get your loan approved, you have to demonstrate the capacity to meet your obligations. Required documentation will usually include a business plan, three years of tax returns, three year financial statements, current financials and an existing debt schedule.

Providing the documentation isn’t always enough though. So, think about any one-off costs over the last three years that may have distorted your financial statements. Also, let the bank underwriters know if there are any changes in the near future that could mitigate expenses or boost revenues. Provide a detailed explanation of what the loan will be used for.

  1. Boost Your Personal Credit Score

A shareholder or chief executive’s personal credit scores are usually irrelevant when a large business is applying for a loan. This isn’t the case for small companies. Your credit score will count toward your business’ overall credit worthiness.

Fortunately, you can take actions to improve your score before submitting your application. Start by paying all bills on time. Second, do not over utilize your credit card e.g. consistently exceeding 50 percent of the card limit. Since pressure for cash compels small business owners to use their own card for routine expenses and travel, overall utilization is likely to go up.

If you find it difficult to steer clear of your personal credit card, you can opt to make your payments at least four days to the due date. This will improve your scores and lower your utilization. It is possible to use this trick to raise your credit score by dozens of points within a month.

  1. Calculate Required Collateral

Bank underwriters will discount collateral based on their past experience with loan liquidation. If your loan is turned down for inadequate collateral, you are free to add more to increase your chances of approval.

This won’t always be possible, especially for small businesses who have limited options. In this case, applying for an SBA-backed loan may be the more practical thing to do. Loans backed by the Small Business Administration have greater flexibility on collateral as long as cash flow is deemed sufficient. SBA-backed loans also have longer terms than conventional loans – up to 10 years.

  1. Improve Equity

Small businesses will be viewed as risky if they have low equity value or high leverage, especially if the owners withdraw nearly all the excess cash flow every year. Banks will be reluctant to approve a loan if the debt-equity ratio is more than 3 to 1.

You can improve your equity ratio with some planning and a few tweaks. For example, can you provide a down payment that would bring the equity-debt rations to an acceptable level? Is it possible for you to pay yourself a lower salary in order to keep more cash in the business? Do you have money in personal savings accounts that could effectively act as equity for the business?

Conclusion

In conclusion, advance preparation takes away a lot of the uncertainty involved in applying for a loan.  Plan, apply, and get back to business with your approved loan.

How did you manage to get approved for a loan?  Do you have any tips or tricks to reversing a denied loan application?  Share your stories in the comments below.

You might also like More from author