The fear of being turned down for a small business loan is often enough to deter entrepreneurs with great ideas from ever even trying. Especially since the peak of the 2007 recession, typically optimistic business owners are hearing from naysayers in every direction that being approved for a small business loan is all but impossible. Though it’s true that you might face challenges while seeking funding, there are many things you can do to improve your chances of being approved.
Let’s explore several steps you can take to avoid being turned down for business funding.
Prepare your business plan
Being approved for a business loan starts with a great business plan. You need to approach lenders with a strong, well-thought-out business idea — knowing what your intentions are for your business and how you intend to get there. The details of your business plan should include how your funding will be used, who your target market is, and any evidence you can provide that approving your application will be a great investment in a successful company — successful enough to pay back that loan!
The key to a strong business plan is to be very organized.
Take your time formulating your mission and vision statements, gathering accurate market data, and preparing basic accounting documents to include in your business plan. All of this information will be important to creditors as they review your loan. Plus, showing that you are organized and well prepared will give lenders more confidence in you as a borrower.
Strengthen your credit scores
Although lenders are starting to consider a wider array of factors in approving loans, your credit score still remains the most crucial component in your eligibility as a borrower. While considering your application, lenders will look into both your personal credit score as the business owner and your business credit score.
To strengthen your credit score, be sure to always, always make all payments on time, both personally and in your business. Since payment history is the single largest determining factor of your overall credit rating, even one late payment can have a dramatic impact on that number.
Check and re-check your credit history
To avoid being turned down for a loan, you’ll want both your credit score and your credit history to be as strong as possible. But did you know that often lower credit scores are the result of inaccurate information on your credit report? Check all of your credit reports, both business and personal, frequently to make sure that all of the entries are accurate reflections of your credit history. Many lenders recommend checking your credit reports every six months to ensure reporting accuracy.
Should you find inconsistencies on your credit report, reach out to the reporting agency to fix the error right away. If you are organized and have maintained good debt payment records, you should be able to prove the mistake and get it fixed, which will in turn improve your credit score. Communicating with credit agencies to fix a reporting error can involve a lot of time and legwork, but it’s worth the effort to increase your chances of being approved for your loan.
Improve your company cash flow
Ultimately, your lender wants to know that you’ll have the ability to pay back your entire loan, on time. To determine this, they might look into your cash flow history to confirm that you have enough money coming in on a regular basis to make your regular loan payments.
One way to improve your cash flow without increasing sales or prices is by offering clients a slight discount for making on-time or early payments. Even a discount as low as 3 to 5 percent might be enough to encourage clients who have the cash available, but weren’t previously in a hurry, to pay your bill. Sending regular payment reminders and offering easier ways for your customers to pay will also improve your likelihood of being paid early or on time.
Maintain a strong bank balance
If your business is seasonal or has an irregular sales pattern, it might be more difficult to maintain a strong, regular cash flow. To offset your irregular receivables and avoid being turned down by lenders, you’ll want to maintain a sizeable bank balance. Ideally, you’ll have more than enough money in your business bank account to cover a future loan payment after all of your expenses (including the current month’s loan payment) are taken out. This will show lenders that you’ll always be able to make your loan payment, even if sales are slow for a month or two.
Plan to offer collateral
Even though you have a great business idea, a strong business plan, money in the bank and a strong cash flow, lenders know the unfortunate truth that eight out of 10 small businesses fail. That’s why many will require some type of collateral to secure your loan. By offering expensive business equipment, business real estate, or even your personal home or other property as collateral, you’ll assure the lender that you have an alternate source of debt repayment in the event that, in spite of your best efforts, your business is less successful than you hope.
Research your lending options
Small business owners have more options for borrowing funds than ever before. While your local brick-and-mortar bank, still feeling the pain of the recession, might be holding back on small business loans, there are many alternative lenders eager to offer funding to qualified borrowers.
Take the time to consider all of your options and apply for the loan likely to be the best fit.
Research online lenders and consider the different loan types that might be the best fit for you. Would a micro-loan, a short-term loan, or a merchant cash advance be a better fit for your current business needs? Take the time to consider all of your options and apply for the loan likely to be the best fit.
Ultimately, lenders are looking to fund borrowers who have the best possible chance at long-term success in their business. By taking these steps to improve your loan application, not only will increase your likelihood of being funded — you’ll also strengthen the future potential of your business as a whole.