Getting a business loan can be an intimidating process, even if you’re a well established company. As many as 45% of small business loan applications are rejected, which is not the greatest number.
We’ll walk you through a few quick tips, so you can increase the chances of getting a business loan.
1. Make sure your business maintains positive cash flow
Cash flow is the difference in the amount of cash available at the beginning of a period (opening balance) and the amount at the end of that period (closing balance). It is called positive if the closing balance is higher than the opening balance, otherwise called negative.
Your cash flow is one of the main factors that lenders use to measure the overall health of your business, and the lenders believe that potential borrowers with positive cash flow will be more likely to make future payments on time.
A late payment, also known as a delinquency, will leave a derogatory mark on your credit report that will stay in your credit report for up to seven years from the original delinquency date. This can hurt your credit scores, which will ultimately affect your loan options.
If you are in a seasonal business, you will have a better chance at getting loan offers if you apply during your most profitable months. Growing revenue will reassure lenders that you can service the loan
2. Review your credit report
Whether you’re going with traditional banks or alternative financing lenders, your personal and business credit scores will play a major role in increasing your loan approval chance. Having good credit scores (670-739 FICO; 80-100 business credit score) will definitely leave good impressions on lenders; however, scores by themselves do not show everything that lenders want to know.
Lenders will look at your payment history, outstanding debts, past bankruptcies, foreclosures, or delinquent accounts, and having too many red flags may get you rejected despite having excellent credit scores. Lenders will often use your credit history to see how you’ve managed credit and debt payments, and having good payment history will show lenders that you are a good risk for a loan. If your credit report shows any mistakes, contact the bureaus and demand correction.
If you are applying for traditional bank loans or SBA loans, it is recommended that your personal credit score to be above 700. If your personal and business credit scores are not so stellar, take your time to build up your credit scores by paying down credit cards, settling old debts, and paying any bills on time. On the other hand, online lenders are generally a bit more lenient with credit score requirements, as they tend to prioritize your time in business and cash flow.
3. Be ready to risk your assets as collateral
Depending on the type and amount of a loan, you may be required to provide collateral to back the funds. Collateral is simply an asset that is used to secure a loan, and in general, it can be anything of value that can be sold by the lender if you can’t make your payments.
A secured loan is a loan backed with collateral and it comes with a variety of advantages: flexible payment terms, wider loan options, and better approval chance. Providing collateral will showcase that you are a good borrower by taking a bit of risk off of the lender and putting it on yourself. Some types of loans need to be backed with specific collateral. For instance, the collateral for invoice financing is the unpaid invoice itself. Other assets that you can use as collateral include home equity, commercial properties, equipment. automobiles, and credit card transactions.
You may not need to provide specific collateral with smaller loan amounts, and some online lenders may require a personal guarantee that puts personal assets and your credit score on the line. Others might want a blanket lien on your business, which is another form of collateral that gives the lender the right to seize business assets in case you default on a loan. Unsecured business loans may be a better route to take for those who simply don’t have collateral to back a loan or don’t want to risk losing their assets.