Small businesses need to borrow money to cover cash flow gaps, use as additional working capital, or finance growth and expansion. Whatever your reason for needing a small business loan, it’s important that you’ve got what it takes to get approved. We spoke with industry experts and found 25 tips on how to improve small business loan application.
Here are 25 tips to improve small business loan application:
1. Determine How Much You Need & How to Use It
Jay DesMarteau, Head of Commercial Specialty Segments, TD Bank
Before you talk to a lender, you should assess your need for financing, how much you intend to borrow, and how the money will be used. Lenders would want to see a clearly defined need, so you should be able to demonstrate this information to them clearly during your meeting.
2. Be Prepared with the 5 C’s that Most Lenders Care About
Sam Hodges, Co-founder & US Managing Director, Funding Circle
Although different lenders have different credit criteria, most of them care about your 5 C’s when it comes to a loan application. These 5 C’s are your capacity to repay the loan, how much additional capital you need, the current condition of your business, the collateral you use to secure the loan, and your overall character as a business owner. Be prepared with these 5 C’s during your loan application and you’ll have a greater chance to qualify.
3. Have a Great Credit Score
Steven Millstein, CFA & CFP, Credit Zeal
Although different lenders have varied credit score requirements, having a high personal credit score – ideally 700 – will significantly help with your loan application. Most lenders consider both your business and personal credit scores, so make sure you maintain a good score for both. Your credit score should be verified by the three major credit bureaus.
For more information, check out our ultimate guide business credit scores.
4. Have Sufficient Cash Flow & Liquidity
Joel Keylor, CEO, Tresle Inc.
When applying for a small business loan, most lenders will typically require a minimum of 20% to 25% as a down payment. This means you should have enough cash on hand to be able to cover this amount. Also, lenders will want to see your regular cash flow and whether or not it is sufficient to cover the monthly payments.
5. Invest in a CPA as Early As Possible
Trey Ramsey, CEO & Co-Founder, Braggawatt
Consider hiring a CPA to conduct a review of your company’s financial statements on an annual basis. While this can add costs to your business, presenting a lender with historical financials that have already been independently reviewed by a CPA can mean the difference in eligibility and/or approval speed. This expenditure is actually an investment especially when you’ll be needing financing to fund your growth or expansion.
6. Prove Your Ability to Repay the Debt
Bryan Doxford, Chief Lending Officer, Excelsior Growth Fund
Qualification requirements typically vary from lender to lender. However, all lenders want to make sure that your business has the capability to repay your debts. So before you apply for a loan, make sure to prepare all necessary documents that will prove your ability to pay for the loan. These documents include business plan and strategies, business and personal tax returns, and latest financial statements.
7. Build Relationships with the Loan Officers
Jesse Harrison, CEO, Employee Justice Legal Team
Good personal relationships with loan officers will go a long way. Sometimes the loan officers act like they are just the frontliners and they have no power to help you with your loan application. But once you build relationships with them using your people skills, you will find that these people have a lot of power and can mean the difference between rejection and acceptance.
8. Target the Right Lender
Paul Koger, CEO, Foxy Trades LLC
Shop for loans from as many lenders as possible to find a financing with the smallest interest rate and best terms. If you’re creditworthy, the banks will lower their interest offers once they find out you’re also talking to other banks. Some lenders are more eager to approve a customer the best terms possible in order to win them over even though there’s no actual competing offer.
9. Be Prepared For Your Loan Presentation
Kala Gibson, Head of Business Banking, Fifth Third Bank
During your loan presentation, the bank wants to understand what you do, what your needs are, and how they might be able to help you without putting them at unnecessary risk. Be ready to explain this and to answer further questions from lenders. The most important things to include in your loan presentation are your plans for the business, how much you want to borrow, and how you plan to repay it.
10. Understand the Requirements & Process of the Lender
Jeffrey Bumbales, Marketing Director, Credibly
Different lenders use different criteria to evaluate a business’s health and have different timelines for approval, so a fundamental understanding of their requirements and process will help you improve your application. Before applying for a loan, do your research first and find out what are the lender’s requirements and their procedure for a loan application. You’ll be better prepared when you have sufficient knowledge about this information.
11. Understand Your Business’s Risk Profile
Kemener Whalen, CFO, BlackRock Construction
You have to understand that the lender is taking a risk. That being said, it’s best that you know what those risks are and understand how a lender is going to view those risks. The more you can show that you understand your business’s risk profile – and respect the risk the lender is taking – the more they will feel comfortable with you as a business owner.
12. Provide Truthful Information About Your Business
Stuart Blake, VP of Sales & Customer Success, BlueVine
When you apply for financing, you need to highlight the strengths of your business but you should also resist the temptation to paint a less-than-truthful image of your business. Don’t try to fudge the numbers because it typically gets exposed in the end and it could hurt your chances of approval. Never ever compromise your integrity or the integrity of your business.
13. Talk About Your Current Business Projects
Matt Fiedler, Co-Founder & CEO, VinylMe Please
Talk to potential lenders about your current plans for the business and what you are going to continue doing that had worked in the past. Demonstrate how the debt would be used for those projects. It’s an easier conversation than trying to sell the long-term vision and potential of your company, which may be different than where you are today.
14. Invest in an Accounting Software
Thomas J. Williams, EA, Tax Accountant, National Association of Enrolled Agents
The underwriting department relies on strong figures and ratios, so you need to make sure your bookkeeping is in order. To do this, you should invest in an accounting software that provides an organized presentation of your financials. Since the approval process depends on an accurate representation of where your business stands, a reliable accounting software will make a good investment for your business.
For more information, head over to our ultimate guide on the best small business accounting software.
15. Maintain a Good Debt Service Coverage Ratio
Yuko Kawamoto, Finance Staff, Founder’s Guide
Most lenders will consider your business’s debt service credit ratio (DSCR) when approving a loan. Your DSCR measures your available cash flow to pay your existing obligations. Most lenders will require a debt service coverage ratio of 1.25 or higher because it demonstrates that you can pay your obligations and still have a buffer for unexpected expenses.
16. Consider Other Loan Types
Darren Schulman, Chief Operating Officer, 6th Avenue Capital
The process of applying for a small business loan usually takes time. When your funding need is immediate, consider other loan types, such as a business line of credit or a merchant cash advance. These types of loans usually have faster turnaround time. You can get approved in a few days or even hours and can get funded in a week or less.
17. Write a Good Business Plan
Deborah Sweeney, CEO, MyCorporation.com
One way to improve your small business loan application is to write a thorough business plan. Creating a traditional business plan allows you to be detailed and objective about your small business. It should cover an executive summary, business description, concept, strategy, industry and market analysis, organization and management, financial projections, financing request, and an appendix.
For more information, you can read our article on how to write a business plan.
According to Smallbusiness.com, there are some banks that don’t lend to certain industries, such as hotels. When applying for a loan, make sure to go to a bank that actually lends to your industry. Further, as there are many types of small business loans available, it’s best to ensure that you are applying for the right kind of loan that best suits your business’s needs.
Most lenders will likely do their own research on you and your business. Capital With Strategy says it’s best to have both personal and business online profiles. Some lenders will review the information about your small business available online, as well as any information on its principal owners. With this, it’s best to keep your online postings and profiles updated.
It’s important to review what’s written on your credit report from time to time to ensure that the details are accurate. According to SalesForce, it’s important to fix the errors on your business credit report as soon as possible, as it would take about 30 days or more for business credit bureaus to resolve an issue. Further, wait until the bureaus resolve the dispute before you apply for a loan.
For more information, you can check out our article on business credit reports.
Although it is not directly stated in the list of requirements, lenders look at your moral and ethical character before making a final decision. Your character is a direct representation of how working with you will be like for the lender, this is why Kabbage recommends that you should be on your best behavior.
When applying for a loan, AllBusiness.com suggests that you decide which kind of financing you need, what your purpose is, and how long you intend to repay the loan. It’s best to prepare two or three different payment plans to present to the lender. If you have a clear payment plan and a backup, you’ll appear to be a responsible borrower which will increase your chances of approval.
According to Forbes, the more educated you are about small business lending options and procedures, the more likely you will be able to improve small business loan application. Learning the technical banking and financial terms used by lenders and knowing the ideal credit scores and debt-to-income ratios will help you prepare better for your loan application.
24. Pay Off Other Debts Before You Apply
Jeff White, Staff Writer & Financial Analyst, Fit Small Business
The less debt you have when you apply for a small business loan the easier it will be for your loan to get through underwriting. Many small business owners take home bonuses every year with excess business cash, but if you’re planning to get a loan soon then you should use the cash to pay off your other debts.
A collateral is a personal or business asset used to secure a loan. When you have a good collateral to secure a loan, you have a higher chance of approval than when you don’t. Most lenders will typically require a collateral if you are applying for a bigger loan amount, if you cannot demonstrate sufficient cash flow, or if your credit score is not that high.
Bottom Line – Improve Small Business Loan Application
Small business loans are not only for businesses that are in financial distress. In fact, as your small business grows, so might your need for additional funding. Before applying for a loan, it’s important to be well-prepared to increase your chances of approval. Don’t ignore the expert tips above regarding how to so you can get qualified quickly when you apply for a small business loan.