Getting a small business loan approved is a decision only a lender can make. However, it is possible to influence your credit history and improve your chances of getting approved by the lender of your choice.
If you are counting on a loan to take your small business to the next level, the following tips will help you get approved for the loan you need.
Tips To Get Your Small Business Loan Approved
1. Tidy Up Your Personal Credit
What does your personal credit have to do with getting a small business loan? If you don’t have business credit – or if your business credit is poor – you’ll be leaning on your personal credit to get approved.
If you’re hoping to get approved for a loan through the Small Business Administration (SBA), your personal credit matters.
SBA loans are popular; the SBA guaranteed more than $28 billion to entrepreneurs in 2019. However, the SBA has strict requirements. For example, you need strong personal credit plus substantial business revenue to qualify. You won’t qualify for an SBA loan if you’ve defaulted on a federal student loan or a government-backed mortgage.
While it is not guaranteed that all lenders will take personal credit into consideration in the absence of business credit, some will. It will not hurt to tidy up your personal credit before applying for loans. Even if lenders do not ever look at your personal credit, your efforts will still be beneficial.
2. Create a Rock-Solid Business Plan
Lenders want to know what you’ll use their money for, and they also want to see that you’ve got a strong ability to repay the loan. A business plan is the most common way lenders obtain this information.
Before applying for loans, create a rock-solid business plan that clearly demonstrates how your business will have the cash flow required to cover operational expenses plus your loan payments. When a lender can see this information clearly, they will have more confidence in lending you money.
3. Reduce Your Debt-to-Income Ratio
On both the business and personal side, reduce your debt-to-income ratio as much as possible before applying for a loan. This is one of the most basic factors lenders look for. If your debt is too high compared to your income, lenders see that as a sign that you might not make your payments.
4. Keep Your Daily Bank Balance As High As Possible
There are a couple reasons to keep your daily bank balance as high as possible. Some loans are approved based on a daily bank balance rather than business income. Also, lenders want to know you have cash on reserve to make your loan payments.
5. Boost Business As Much As Possible Prior to Applying
Lenders are more likely to approve loans for small businesses that are generating revenue. If you are just starting out, you won’t have revenue to boost. However, if you are already in business, spend some time boosting your sales as much as you can.
You can boost revenue by:
- Consulting with a professional marketing firm to launch a new campaign
- Running PPC ads on a regular basis and then using retargeting
- Capturing emails and running an email marketing campaign to nurture leads until they become paying customers
There is always something you can do to boost business revenue and show lenders you have the ability to repay a loan.
6. Know your Business and Personal Credit Scores
Knowing your business and personal credit scores will help you get approved because if your score is poor, you can tidy up past due accounts and work to bring your score up before applying for loans.
Business credit is calculated on a score of 0-100. An ideal business credit score would be 75 or higher. Don’t know your score? You can get it from Experian or Dun & Bradstreet.
If you don’t have business credit, your personal credit will play a role in getting approved for a small business loan. In this case, you’ll need a personal score of at least 640 to qualify for most loans.
Getting your Credit Score and Credit Reports
You’re entitled to one free credit report each year, but credit reports don’t always include your actual credit score. Getting your free yearly credit report will tell you where you stand with your accounts, but you’ll probably need to pay a small fee to access your specific credit score.
To qualify you for a loan, most lenders need to look at your specific credit scores. Since each credit bureau scores credit independently, you’ll want to get all of your credit reports from TransUnion, Equifax, and Experian.
Multiple Credit Scores
You may not realize it, but you may have a multitude of credit scores and it’s wise to know all of them before applying for a loan. Generally, you’ve got a FICO and a Vantage credit score. However, there are multiple scores within each of those categories that are calculated by different financial institutions and some scores are only reported to certain bureaus:
- FICO 5. This score is calculated by Digital Federal Credit Union (DCU) and is only available from Equifax.
- FICO 8. This score is calculated by American Express, Discover, Bank of America, Walmart, and a couple other financial institutions. American Express reports this score to all three agencies but Discover only reports to TransUnion and Experian.
- FICO 9. This score is calculated exclusively by Wells Fargo and is only reported to Experian.
- FICO Bankcard Score 8. This score is exclusively calculated by Commerce Bank and is only available from TransUnion.
- FICO NextGen. This score is calculated by PenFed Credit Union and HSBC and is only available from Equifax.
- VantageScore 3.0. This score is calculated by several online financial institutions and is available from all three major credit bureaus from most institutions.
The above list is not exhaustive, so talk to your financial institutions to find out where they report your credit accounts. You need to know exactly where your credit gets reported so you can get the right reports and tidy up your credit before applying for a loan.
7. Know Lender’s Requirements Before Applying
Before applying for any loan, know the minimum qualifications first. You don’t want to waste your time applying for loans you don’t qualify for.
Meeting the minimum requirements is good but exceeding them is better. Generally speaking, most lenders don’t want to see any recent bankruptcies, delinquencies, poor business revenue, or low credit scores. However, some lenders make exceptions for applicants that are weak in one area and strong in another. For example, if you had a bankruptcy five years ago, but your current business is bringing in high revenue consistently, a lender might consider approving you for a loan.
How to Get a Small Business Loan
Many entrepreneurs looking to start or maintain their businesses resort to small business loans. But with financial institutions tightening their lending standards, you can hesitate to apply. However, understanding the ins and outs of applying for a small business loan and how to navigate them can increase your chances of approval.
Here are the steps to follow to qualify for a small business loan:
1. Define the Purpose of the Loan
When you express your interest to borrow from a financial institution, the lender always asks why you want the loan. Be sure to outline your needs before approaching the lender. Whether it’s starting a business, growing your company, managing your day-to-day expenses, or providing a safety net, the lending institution will want to know.
There are several types of small business loans, and your eligibility depends on your reason to apply. For instance, banks and online lenders will assess your cash flow to evaluate your ability to pay. So, most of them will decline your loan application if you’re looking to start a business since you won’t have any records.
2. Raise Your Loan Security
A lender can decline your loan application for many reasons, but lacking collateral is one of the biggest hurdles. Collateral serves as security for the lending entity if you default on the loan or cannot repay for some reason. If your business can’t raise the required security, consider exploring no-collateral business loan options.
However, no-collateral loans aren’t entirely unconditional. The lender might require you to consent to a Uniform Commercial Code (UCC) lien or sign a personal guarantee.
Uniform Commercial Code
By agreeing to a UCC, the lender gets a blanket lien that authorizes them to attach your company’s assets if you default on the loan. The bank can foreclose on a business property that you didn’t provide as security when applying for the loan.
On the other hand, a personal guarantee is an agreement that you’re personally responsible for the business loan. The lender can’t attach any of your business assets if you don’t pay the debt, but they can take legal action against you.
3. Compare Different Lenders
You can get a business loan from banks, online lenders, and micro-lenders. Their typical funding options include term loans, accounts receivable financing, and lines of credit.
If you want a credit line, term loan, or commercial mortgage, and you can provide collateral, you can visit an ordinary bank. Good credit will be a requirement. If you take this route, check to see if you qualify for an SBA loan.
SBA loans are a product of the collaboration between the U.S. Small Business Administration (SBA) and commercial banks. The lender gives loans to businesses, and in the unfortunate scenario of defaulting, the SBA pays 85 percent of the resultant loss. You could qualify for a loan between $25,000 and $5 million, payable in monthly installments.
Banks offer reasonably low annual percentage rates (APR) on loans. However, many SMEs don’t qualify for the offers due to low sales volumes and inadequate cash reserves. Other factors include the business owner’s bad credit and lack of collateral. Furthermore, it takes time to get funded even when qualified.
Online Small Business Loan
Small businesses find online loans more convenient than bank loans. Online small business lenders like First Down Funding distinguish themselves from traditional financial institutions in the following ways:
- Lenient qualification requirements
- 24/7 availability through apps
- Minimal documentation
- Straightforward application process
- No need for physical meetings
- Quick approval and disbursement
First Down Funding Small Business Funding
First Down Funding is an online small business loan lender focused on developing and approving online cash advances for small and medium-sized enterprises. These include businesses that can’t secure funding through banks and other traditional methods.
The lender offers the following loan products:
- Small business funding: Credit lines, invoice financing, etc.
- Bank-only ACH: Immediate funding based on daily/weekly sales
- Working capital: Funds to meet operational needs
- Next day funding: Working capital in 72 hours
- Bridge funding: Bridge the costs of two funding options
- Merchant cash advance (MCA): Funds in exchange for a percentage of credit card income
- Short-term funding: Meet immediate or short-term business needs
- Long-term funding: Get $2,000 to $300,000 for long-term goals
If you are wondering how to get a small business loan online from First Down Funding, the process is as easy as follows:
- Apply online via a secure online application
- Get pre-approved in minutes
- Receive the funds within 72 hours
What’s more, the average approval rate is 75%.
4. Determine If You Qualify
Lenders want the assurance that you’ll be able to pay the requested amount before approving it. Here are four fundamental criteria they use to scrutinize you.
According to lenders, there is less risk in approving loans for people and companies with good credit. Good scores for individuals are above 750, while excellent credit scores for businesses start from 80.
The lender will investigate your business trends, especially your cash flow and revenue growth. Your financial statements for the past two years should be promising.
The bank will also evaluate your ability to spend your business loan effectively. Update your business plan to show your growth plans, projected financial growth, and how you intend to repay the loan. Include resumes of the management team and explain how they will contribute to your bottom line.
We’ve already explained why collateral is necessary, especially when dealing with banks. If you can’t raise it, discuss with a no-collateral business loan lender to see if you can meet their conditions.
5. Gather Your Documents and Apply
The documents necessary for loan applications vary with lenders. Here are some of the papers you must provide:
- Business financial statements
- Personal and business tax returns
- Personal and business bank statements
- Business legal documents
- Business plan
6. Review the Terms and Sign
Once approved, examine the loan agreement before signing. Pay attention to:
- Interest rate
- Annual percentage rate
- Payment schedule
- Loan term
- Origination fees
- Prepayment penalty
These, along with other factors, can significantly affect the true cost of credit. If you are comfortable with the terms, sign the agreement and wait for funds.
Small Business Loans FAQs
Identify a potential lender and open their online app. Key in the required information, send your application, and wait for approval.
Make sure your business has operated for at least one year because your financial records are necessary.
Please read this guide on tips for getting your small business loan approved.
Loan limits depend on what the lender offers. You can get up to $300,000 from First Down Funding.
The requirements vary, but you need good credit, organized business financials, and a business plan. You also require collateral unless the lender offers unsecured business loans.
The greatest challenge for small businesses is the lack of assets to offer as collateral. Startups sometimes get disqualified for the lack of financial records. Call different lenders to compare their offers and qualification requirements.
Are you looking for a small business loan lender? Apply now and find out if you qualify in minutes.
Choose The Right Lender
Choosing the right lender is important, but who has time to fill out multiple applications? The good news is, by applying for a loan online through banks.com, you can submit your application to multiple lenders with just a single application. With one simple application, you’ll receive offers from various lenders to compare rates and terms. Once you find the loan that’s right for you, you’ll feel secure knowing you’re getting the best loan for your business.