Small business mostly experiences a great hurdle whenever they are trying to get a small business loan.
This is mainly because of strict lending standards set by banks.
However, getting financing from an outside source is usually necessary if you want your business to grow or at least cover the everyday operational expenses, including inventory, payroll, etc.
While finding, filing for application, and getting approved for business loans can be really hard, there is nothing that can help you better than being prepared.
So, how do you get approved for a business loan? Here are five tips on how to increase your chances of getting that loan approved:
- Determine the reason why you need the loan.
Lenders will ask this question one way or another, “why do you need this loan?”, and your answers are more likely to fall into these categories:
- To use the money to start the business.
- To use the money to pay for day-to-day expenses.
- To fund the business expansion.
- To have funds as a safety cushion.
- Determine which loan type is right for you.
Why you need the loan will help you decide which type of loan to get. For instance, if you are starting a business, it is almost impossible to get approved for a loan during your company’s first operating year. Most lenders require certain reports like cash flow in order for them to know if you can repay the small business loan that you are applying to. Hence, you are more likely to get disqualified from bank financing if you are a startup. Nevertheless, you can opt to use business credit cards or personal loans from your family or friends. Some even get their loans from nonprofit lenders.
If your business is already in operation for a year or so, then you have more options for financing, such as SBA loans, term loans, invoice factoring, business lines of credit, and the like.
- Know which is the best among the small-business lenders.
Small business loans can be obtained from several lenders. These include banks, online lenders, and nonprofit lenders. They offer loan products like term loans, accounts receivable financing and business lines of credit, among others.
You need to compare the pros and cons of the available funding options before choosing the best that is right for you. Weigh your options and compute the annual percentage rate of each. Also know which of them offer the best terms and the lowest APR of the loans that you have qualified for.
- Make sure you qualify.
First, check what your credit score is. Your rating on the credit spectrum is a very important factor that will help you qualify for loans. You can obtain your credit report from several major credit bureau. You can also check online on how to get your credit scores through reputable providers. To give you an idea, most banks prefer borrowers to have a credit score of no less than 680.
How long you’ve been in the business also affects your standing. For most banks, you need to be in the industry for at least two years while most online lenders require at least a year of business operation to qualify.
Of course, the lender will ask how much money you make. Most online lenders want you to have a minimum of $50,000 annual revenue, while banks typically have a higher minimum requirement. Moreover, check your business financial statements, particularly the cash flow. This will help you evaluate if you can afford the monthly loan payments. In order to repay your loan comfortably, you must have a total income that is at least 125% greater than your total expenses. The expenses must include your new repayment amount.
- Gather necessary documents.
Once you have your options, it is now time to apply for a business loan that fits your needs and which you qualify for. The documents needed may vary from one lender to another, but basically, they will require the following:
- Personal and business tax returns
- Personal and business bank statements
- Financial statements of your business
- Other legal documents of your business (commercial lease contract, articles of incorporation, franchise agreement, etc.)
Now that you have the answer to the question ‘how do you get approved for a business loan’, we hope you will follow these tips and let them help you in any way. Keep in mind that there is no surefire way of getting your loan application approved, but you can have a better standing if you do your application with confidence and make sure that you are prepared in any aspect.