Small businesses need to borrow money to cover cash flow gaps, have additional working capital, or finance growth and expansion. It’s important for business owners to carefully prepare a loan application to increase their chances of approval. To help, we spoke with industry experts who shared their best small business loan application tips.
Here are 25 small business loan tips according to experts:
1. Stick to Strategic Borrowing
Ty Kiisel, Editor, OnDeck
Anticipating your business’ need for financing with a strategic approach to borrowing makes sense at several levels. For example, it enables you to be less reactionary – meaning you can better prepare for a slow season and apply when it makes the most sense. In the midst of a slow season, when cash is tight, isn’t the best time to apply for a loan. What’s more, taking a strategic approach to borrowing gives you the opportunity to forecast your financial needs, gives you time to evaluate your current credit situation, and allows you to take action to improve a weak profile or otherwise improve the odds of an approval.
2. Demonstrate How You Intend to Use the Funds
Sarina Siddhanti, U.S. Head of Commercial, Funding Circle
Lenders will need to understand why you’re looking for funds and how you intend to use the money. Working capital is rarely a sufficient explanation for an underwriter. For instance, instead of asking for $100,000 in working capital, if an applicant says they need $33,000 for inventory, $37,000 for new hires, $20,000 for enhancements to their location, and $10,000 for advertising, the credit provider will be much more confident in your planning and your ability to effectively deploy the funds. You will also need to be able to express how the loan will help the business and how it fits in with your overall plans for growth.
3. Prepare Before Meeting With the Lender
Jay DesMarteau, Head of Commercial Specialty Segments, TD Bank
When submitting a small business loan application, it’s crucial that SBOs meet with their banker and arrive at that meeting prepared with necessary documents, which include: clear revenue records, a written business plan, and tax statements. Having this information on hand increases a bank’s ability to discuss the most appropriate loan options and specific financing needs for the business. In addition to preparing materials, SBOs must also be able to state how the financing will be used. Another key aspect for SBOs to keep in mind is their business credit score. Because personal credit impacts business credit scores, SBOs need to ensure their credit profile is in order: lowering their debt-to-income ratio, submitting payments on time for student loans or mortgages, and establishing a strong credit history.
4. Fill Out Your Application Accurately
Janet Gershen-Siegel, Content Manager, Credit Suite
For any sort of business application forms, loans included, one big thing to keep in mind is congruence. Typos and anything which doesn’t match can be reasons for denials. For instance, for a company with the word Limited in its name, this even means spelling out Limited versus abbreviating it as Ltd. Loan providers are not going to stop and consider all the myriad ways a business could possibly be listed. Don’t give loan providers a reason or chance to deny your application, so make sure the business and all its attendant information (e.g., phone number, address, fax number, and web address) are identical across the board. Copy and paste is your friend, so use it.
5. Be Honest With Your Lender
Ben Gold, President, QuickBridge Funding
The process of applying for a business loan runs smoothly when both sides are on the same page. Find a lender that will be direct and honest with you about how or if they can help your business. Of course, that means you need to do the same. Explain in detail what you expect from the lender and how you plan on using the funds. Both lenders and borrowers must have clear expectations for the relationship. Getting specifics about the lender’s requirements and application process will help you understand if they are a good fit for your business. And being forthright with your business information and intentions helps prevent future hold-ups in the application and funding process.
6. Polish Your Business Plan & Executive Summary
Sarah Hancock, Chief Editor, BestCompany.com
Business owners can better their chances of receiving a loan by having a solid business plan and a polished executive summary to share with the lender. Lay out exactly what the company does, how it will make money, and why customers will pay for it. In addition, talk about the market opportunity, the competitive landscape, and why your company has an advantage. Don’t forget to describe your team members, your business model, and your costs (e.g., salaries, rent, and equipment). You want to convince the lender that you have a great idea as well as the means to carry it out and be successful.
7. Choose the Right Type of Loan for Your Needs
Jacob Dayan, CEO, Community Tax
If you’re in a time crunch and need to speed up the loan application process, investigate alternative funders outside your bank, as they can typically get you the money quickly. Be warned that their interest rates are typically higher than average. SBA 7 loans are good for businesses with good credit that need long-term financing. SBA 504/CDC loans are good for those looking to purchase real estate and equipment, but good credit is needed here as well. There are so many different loans out there, you should research what will work best for your business’ needs
8. Secure the Loan With Collateral
Yuko Kawamoto, Finance Staff, Founder’s Guide
One way to increase your chance for a business loan approval is to offer a personal or business asset as collateral to secure the loan. Most lenders will require collateral especially if you are applying for a larger loan or if your credit score is not that high. Just make sure that you will not go into default, because the lender may take your asset if you cannot repay the loan.
9. Know Your ROI Before Borrowing
Roie Raitses, Co-Founder & Chief Marketing Officer, Fast Capital 360
Capital enables action, providing your business with funds you can use to invest in new equipment to spur production, buy inventory to boost sales or invest in technology to streamline operations and improve productivity. When offers are presented, the cost of borrowing may be higher than anticipated – but that doesn’t mean it’s a bad business decision. In fact, research from a study on the economic benefits of online lending revealed that companies experience an
average increase of $2.31 in sales for every dollar borrowed. By examining your projected return on investment, you can determine if the use of funds will net a profit. With a clear understanding of what you stand to gain, you can make the best decision for your business.
10. 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.
11. 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 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.
12. Consider Crowdfunding Platforms
Marwan Forzley, CEO, Veem
Thanks to financial technology, small businesses have many alternatives for traditional bank loans, like crowdfunding platforms. There are three main types of crowdfunding platforms you can choose from:
- Reward-based platforms: These are the most popular among crowdfunders. You set up a campaign, you collect donations, and in return, you promise some kind of incentive to your donors. Kickstarter, Indiegogo, and RocketHub are just a few of the most popular crowdfunding websites. Research your options and pick the one that offers the best terms for your particular funding project.
- Loan-based platforms: You can ask for peer-to-peer loans from individuals, other businesses, or anybody who believes in your project. Check out companies like LendingClub and Prosper, and decide whether opting for loan-based crowdfunding over a traditional bank loan is the way to go for your business.
- Equity: Although they may not be strictly considered crowdfunding since their donors are not always “average” people but accredited investors, equity-based platforms are still a viable option for many small businesses. Websites like AngelList, FundersClub, and CircleUp allow you to look for real investors in your company. Note that this type of crowdfunding usually favors startups, so it may not be a right fit for every small business.
13. Study Your Business & Analyze Your Competitors Thoroughly
Paola Garcia, Vice President, Excelsior Growth Fund
It’s hard to believe, but many small business owners can’t articulate a lot about their industries or competitors. Take the time to develop talking points on your business’ operations, cycles, and competition, as well as industry trends. This demonstrates that you’re forward-thinking and instills confidence in your lender that you know what you’re doing. Analyze what your competitors are doing and how you expect to get and maintain a competitive edge with specific plans.
14. 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 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.
15. Target the Right Lender
Paul Koger, CEO, Foxy Trades LLC
Shop for loans from as many lenders as possible to find 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 the best terms possible to a customer in order to win them over, even though there’s no actual competing offer.
16. Invest in 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.
See our list of best small business accounting software for 2019.
17. Research Banks That Are Aligned With Your Long-Term Goals
Sean A. Tomalty, DMD, CEO, Tomalty Dental Care
When applying for a business loan, it’s important to research the banks that you will be applying to. Many large national banks are set up very differently as to how they view businesses. The first step is to start by defining your long-term goals and having an honest conversation with your banker. If your goal is to grow a retail store to over 20 locations, but your lender typically only helps businesses finance one or two locations, then they may not be a good fit for you. Conversely, a lender who feels comfortable with aggressive growth may allow you to scale quicker and faster, but might not be a good fit if you only want to build one retail store. The reason for this is because those banks typically have higher interest rates and other loan covenants that aren’t required for a small business. For these reasons, knowing what your bank’s sweet spot is very important.
18. Maintain 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.
19. Resolve Any Tax Liens or Past Due Payments
Kamy Ahmed, Finance Expert, Sprout Lending
If you have open tax liens or more than 30 days of late payment, it can be more difficult for you to get approved for a business loan. Also, it might become a much longer process, as you may have to prove that you can manage your finances better. It’s best to set your credit record straight and have no issues with your taxes and other obligations to make your loan application less stressful.
20. Build Relationships With 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 front-liners 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.
21. Understand Your Business’ 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’ risk profile – and respect the risk the lender is taking – the more they will feel comfortable with you as a business owner.
Small Business Trends suggests setting up your business as an LLC or a corporation, as this will help your business to build up its own credit and financial records. Once you build your own business credit, it will become easier for you to get approved for a small business loan. Additionally, setting up the right business entity will help you protect your personal assets.
According to Merchant Maverick, increasing your debt service coverage ratio (DSCR) is one way to get approved for a business loan fast. You can do this by paying off your existing debt, increasing your net operating income, cutting back your net operating expenses, and lowering your borrowing amount.
Lenders need to see the latest copies of your records to assess your business when you’re applying for a business loan. Because of this, Fleximize suggests that every business owner keep their business records up to date. It’s essential to make sure that the company can provide the most recent copies of their financial records and other business documents as soon as the lenders ask for them. This makes the loan process quicker and smoother.
Gud Capital LLC recommends business owners who are looking for a business loan do their research and know all the credit options available to them. Knowing your options allows you to make the best choice for your company. Since the rates, terms, fees, and requirements of different types of business loans vary greatly, it’s essential to understand your needs and know your financing options to help you make smart decisions.
According to Strategic Capital, lenders will likely do their own research about you and your business, so it’s important to ensure that you have an good, updated online presence. Lenders will likely review the information about you and your small business available online. Make sure to review this information and make the necessary updates as soon as possible.
A small business will typically need additional funding at one point or another. Before applying for a loan or business line of credit, it’s important to be well-prepared to increase your chances of approval. Make sure to use the above small business loan application tips from the experts to make sure you qualify and can close on your loan quickly.