At some point in the business cycle, entrepreneurs will need a cash flow boost to invest in business opportunities. While there are a lot of funding options available for small businesses, almost all companies usually turn to small business loans to get the extra capital they need.
In general, banks offer the best terms (i.e., they have longer repayment periods, lower interest rates, higher funding amounts, etc.). However, they are notorious for being risk-averse, and qualifying for small business financing for them could be challenging, especially for startups. To qualify, you need to undergo a stringent application process, submit a laundry list of documentation, and wait a few weeks (or months) for approval (or rejection).
On the other hand, alternative financing companies may be more lenient with their eligibility criteria. Unlike banks, they’re more willing to take risks by lending to small businesses. But know that if you go with alternative lenders, their financing products can be more expensive.
That doesn’t mean to say that you can’t qualify for better loan terms from banks or alternative lenders. Fortunately, you can take steps towards improving your odds of getting small business financing with excellent terms.
In this article, we’ve laid out the top seven tips to improve your chances of getting a small business loan with excellent terms:
1. Prepare the Documents Ahead of Time
As mentioned, banks are more likely to require the borrowers to submit a long list of documents to prove their eligibility. Alternative lenders, on the other hand, may require less. Regardless of where you’ll apply, you want to make sure that you know what documents you’ll need to submit and prepare them ahead of time. Doing so will demonstrate responsibility and may contribute to your success in your loan application.
While different lenders may require additional documentation, generally, you’ll want to prepare these documents to be sure:
- Proof of identification
- Employer Identification Number (EIN)
- Balance sheets
- Profit and loss statements
- Tax returns
- Business and personal Bank statements
- Credit report
- Business plan
- Business registration and licenses
- Financial statements
Submitting the complete list of documents ahead of time will also help expedite the loan approval process as it lessens the need for you to go back and forth to submit the needed documents.
2. Maintain a Stable Cash Flow
One of the primary reasons why businesses get rejected for a loan is cash flow issues. This is true, especially for companies that have large upfront costs and equipment. One important thing to ensure when applying for small business financing is to show the lenders that you have control over your cash flow.
In other words, you have to see to it that the amount that goes into your expenses is less than the amount of the cash flow going in. Otherwise, the banks or other lenders may think that you won’t be able to afford the repayments for the financing. As a result, you may either get rejected for financing or receive less flexible loan terms (i.e., high-interest rates, shorter repayment period).
That said, there are a lot of ways to manage your business’ cash flow. This includes:
- Constant cash flow monitoring
- Staying on top of your customer invoices
- Keeping a detailed record of your business expenses
- Cutting costs
- Getting a business line of credit before you experience cash flow issues
3. Keep Your Credit in Good Standing
Although some companies may not need to work on improving their credit score, they do need to keep them in good standing. Many businesses often get their loan applications rejected because of a low credit score or lack of credit history. This usually happens with bank loan applications. While that doesn’t necessarily exempt them from loan products from alternative lenders, they can expect the loan terms to be less flexible than those offered to borrowers with stellar credit standing.
If your business doesn’t have a good credit standing, you can try several things to improve it. Here are a few practices worth considering:
- Pay your loan balances before the deadline
- Pay off some of your loans
- Don’t close off old credit accounts
- Keep your credit utilization below 30%
- Work with suppliers that directly report payments to the credit bureaus.
- Check your credit report regularly
4. Ace Your Business Plan
Your business plan is the best way to convince the lenders why you need a business loan and whether or not your reason is plausible or worthwhile. If it is, only then will they decide to approve your application.
With that, you want to make sure that your business plan tells everything about your business. This means telling your story to the lenders and getting them in sync with your ideas. Get them to understand why your business idea would be profitable. Include your business history, goals, and what you want to achieve with your business. Outline the steps you’ll take to make sure that you reach your goal while earning a profit.
Also, state some barriers that might prevent you from achieving your goals and what you will do to overcome that. This will show the lenders that you’re really dedicated to seeing your business grow. Conduct competitive analysis and make sure that you have an accurate financial forecast as this will convince the lender of your business idea’s profitability.
If you already have a business plan, go over it with your team again and make the necessary changes. Times can change, so you may have to adjust your strategies to keep up.
5. Apply from Your Existing Bank
If you’re already working with a bank – whether you’ve paid off a debt or you have an active account with them – applying for a business loan from them might increase your chances of approval. Since you have a history with them, they are already aware of your repayment behavior. This is, of course, considering that you have a good relationship with them.
Aside from that, you won’t also have to submit a long list of documents because, again, chances are, they already have a record of your financial documents from before. This, in turn, reduces your chance of getting declined because of the lack of documentation.
When applying for funding from a lender you already work with, make sure that they offer the loan product you need. If not, ask if they can recommend another option that will help you address your business needs.
6. Have a Reasonable Explanation of How You’ll Use The Money
Before applying for a loan, you should already have a clear plan of how you’ll use the proceeds. This will make it easier for you to convince the lender why they should approve your loan. This will also demonstrate to the lenders that you’ll be responsibly using the borrowed cash.
Though this will be shown on your business plan, the loan officer in charge of your application may ask you again why you need the loan during your interview (if they’re conducting one). If you’ve already figured out how you’ll use the money, it will be easier for you to answer this question.
Remember, be honest and transparent with your answers. If the lenders find out that you’re dishonest, it will hurt your chances of qualifying.
7. Ask for Professional Help
If you’re still not sure about how you can improve your chances of getting approved for a loan, consider consulting with a professional. Banks and other alternative lenders usually have staff who are well-versed with the whole loan application process. They might be able to advise you on some of the lesser-known methods of making your business a better candidate for a loan.
As an alternative, you can consult your accountant to help you get your finances in order. Doing that enables you to determine what gaps you need to solve, so you’ll have better chances of qualifying. Also, it will help you identify what type of loan you need and can afford. Moreover, with organized financials, it will be easier for the lenders to go through your financials and assess your eligibility.
The Bottom Line
Businesses, no matter what industry they’re in, need stable cash flow to survive. While business loans are ideal for achieving it, you need to plan for the application thoroughly. Sometimes, the reason behind loan rejections isn’t because the business isn’t eligible. But it could be because they’re rushing into it.
That said, always do your research and prepare. It’s the best way to improve your chances of getting your business loan application approved.
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