Procuring a small business loan is a challenging process as there are innumerable SMEs which are looking to either enter the market or gain a larger share with the limited resources available on hand.
Small businesses often jump through multiple hoops trying to improve their chances of loan approval. The approval for small business loans largely depends on several factors. In this guide, we share some effective tips to improve the chances of getting a small business loan:
#1: Be Aware of your Latest Credit Score
Lenders verify credit scores to determine if the applying business is a good candidate for a loan. Essentially, they try to see whether the applicant is trustworthy and capable of repaying the loan on time. Before approving a business loan, lenders analyse the applicant’s business credit score and also the personal credit score of the owner.
Before applying for a loan, it’s mandatory to check your business and personal credit reports. If the credit reports have any errors, they can always be disputed. It is crucial to closely evaluate credit histories and verify any negative activity that can be remediated before making a loan application.
For improving credit score, reach out to CreditMantri, which is a trusted platform for verifying and improving your credit score. Making timely payments on all open and active accounts, keeping a tab on debts, and working towards improving credit limits are some of the strategies for improving credit score. For a poor credit history, it is ideal to get it rectified before proceeding with the business loan application.
#2: Design a Strong Business Plan
Lenders may require applicants to furnish a business plan. Hence, it is sensible to include a well-structured and concrete business plan combined with a crisp executive summary. This can be combined with the loan application to create a positive first impression. This reflects that the business and its owner are responsible, organized, and well-prepared, for taking a loan for the business.
A business plan must be very specific and tell exactly what the company does, the ways that it makes money, and reasons why there will be sufficient demand for the products or services. It should highlight the market opportunity, the existing competition, and why the company has an edge over others. A brief description of team members, the business model, and various costs (salaries, rental, equipment, etc) can go a long way in giving essential details to the loan provider. A business plan is an effective tool to convince the lender for granting a loan.
#3: Clean up your Financials
A company’s financial statements and records are reviewed thoroughly by the lender at the time of seeking a business loan. Thus, it is important to have a clean balance sheet, cash flow statements, and up to date income and loss statements.
Apart from detailed and clean financial statements, it makes sense to have a certified public accountant verify and validate them before furnishing a loan application. Most lenders consider financial statements which are audited or reviewed by a chartered accountant.
#4: Make Your Online Presence Count
Lenders often perform thorough due diligence during a loan approval process. This includes reviewing all the available information provided and details of the company as available online. Before making a loan application, businesses must check and verify the company’s website and ensure that the details are up to date. A company’s social media presence on sites like LinkedIn, Facebook, and Twitter must also be checked in advance and all necessary changes must be made before applying for a loan.
A business can seek feedback and ask for reviews from existing customers. Also, responding to customer reviews on Google My Business or third-party review sites can work in your favour. Responses to any open issues and effective remediations mentioned on such sites can create a positive impression of the business.
#5: Do Your Homework
Lenders prefer to work with educated and experienced borrowers who are well aware of their business. Lenders can easily gauge whether the applicant is serious about conducting the business or otherwise.
Thus, the applicant must educate himself or herself about small business loan options and processes. Details like how a business loan works, various loan options, or common industry terminologies, etc can be focused upon before reaching out to a lender. Detailed homework on the part of the applicant can go a long way in creating a positive impression on the lender and improves the chances of getting a small business loan.
#6: Know-How to Use Funds
Lenders are always keen to know how the funds will be employed. Hence, it’s important to know the details beforehand. For instance, will the loan be used for purchasing inventory? Equipment? Marketing? Hiring?
Once it is clear where the loan will be used, an applicant must determine a realistic borrowing amount for covering all expenses. Overestimating costs and asking too much can prove to be dangerous. Same goes for underestimating expenses and borrowing too little. It is best not to guess how much cash is needed. Instead, one must take time to do some number crunching before finalising on a figure.
#7: Decide on the Right Loan Product and Lending Institution
There are several different small business loans available in the market. Not all the loans are meant for all businesses. To avoid wasting time on multiple loan applications, it is best to shortlist which is suitable for your business. This will also help in increasing the chances of approval.
Some of the common business loan types are instalment loans, short-term business loans, equipment loans, lines of credit, merchant cash advances, working capital loans, etc. The right business loan option will depend on the specific business requirements and repayment terms that are comfortable for the business.
Apart from various business funding options to choose from, several lenders can offer a business loan. For instance, there are large commercial banks, cooperative banks, online lenders, or peer-to-peer lenders. Each lender offers diverse products and has various criteria for borrowers. Some lenders weigh good credit scores while some focus on the annual revenue generated by the business. A good insight into the lender’s mindset will help the business improve the chances of getting the loan application approved.
A small business must check for the available repayment options before applying for a small business loan. The repayment terms shouldn’t put undue pressure on existing finances of the business. Detailed planning and transparency throughout the loan application process can help in saving a lot of time and efforts.