In this Article – Tips for Business Loan Approval
What Lenders Look For When Making a Business Loan
Getting a small business loan approved is a matter of presenting your business as a good lending risk to business lenders. When you submit a loan application to your lender it is reviewed by an underwriter who is the person or department that will make the decision on your creditworthiness and ultimately decide to approve or decline your loan request.
By understanding the eligibility requirements and the application process, entrepreneurs can increase their chances of being granted business financing.
Understanding Small Business Loan Options for Your Type of Business
Understanding the right loan programs for your business and industry. Depending on the business need, there are many different funding options. Are you looking for a business line of credit, a short-term loan, equipment financing? The type of financing you are seeking will tell you how to prepare to increasing your chance of getting your business loan approved.
Secured Loan vs Unsecured Loan
The first thing you should consider are the loan options available to your industry and the purpose of the loan or business need. For example, are you buying real estate or purchasing equipment? These are likely to fall into the category of secured loans and have specific loan programs that typically carry lower interest rates because they are secured by the real estate or equipment that you purchase.
In the case of an equipment purchase, you may want to consider equipment financing. This type of funding option is generally easier to qualify for and often is made regardless of your personal credit score. Similarly, a real estate loan or commercial loan that is backed by an asset with tangible value will likely have larger loan amounts.
On the other hand, if you are seeking a general purpose loan or a working capital loan from a traditional bank, the loan determination will depend on your credit report and other factors to determine creditworthiness. In addition, small business owners may be required to make a personal guarantee for repayment of the loan if the business defaults.
Other types of financing such as a merchant cash advance are unsecured financing programs that rely on future revenue of the small business. These tend to be unsecured funding programs.
Get Your Personal and Business Credit in Order
Once you have identified the type of loan appropriate for your business, you need to understand your credit report. In most cases, especially with regard to traditional bank loans, your eligibility will rely upon your personal credit score.
Managing your personal credit history as well as your business credit scores is a process of best practices and requires time to improve, but the benefits can save a small business owner thousands in lower interest rates. Over time, with proper management, you can improve bad credit dramatically. Having good credit can have a very profound impact on interest rates and monthly payments.
Review your credit report to insure it is accurate and contains no errors our outdated information. If you find inaccurate or outdated information on your credit report, ask the credit reporting agency to remove it.
A significant component of your credit score is determined by how much of your available credit you are using. This is referred to as credit utilization. For example, if your credit limit on all your cards is $10,000 and you have balances of $5,000, your credit utilization is 50%.
If you are able to get your credit card issuers to increase your limit to say $15,000 or $20,000 then your credit utilization will go down to 33%, 25% and so on.
Your personal credit score (a good credit score) is a powerful asset when considering financing options. For example, the U.S. Small Business Administration offers loan programs that have the lowest interest rates and favorable repayment terms, but only lend to business owners with good credit scores and solid credit history.
Reduce Debt-to-Income Ratio
Your debt-to-income ratio shows lenders your ability to repay a loan based on current debt versus your income. Where possible, reduce your debt-to-income ratio by paying-off debts or increasing revenues. Keep in mind that certain debts are weighted more heavily than others.
Increasing revenue can be accomplished in the short-term by offering your customers quantity discounts at lower prices, thereby boosting your top-line sales. Similarly, you could offer clients extended payments for immediate purchases.
It is important to build revenue as much as possible prior to making your loan application. It might make sense to engage and accelerate any marketing programs to drive revenue as high as possible over several months before applying for any type of financing. The key is to paint a picture that shows cash flow and annual revenue sufficient to satisfy the eligibility requirements.
This is a key business metric that will have an impact getting your business loan approved and repayment terms. This is also a significant component in your business credit score.
Maintaining a Business Bank Account
Most financial institutions as well as online lenders will require you to maintain a business bank account. But just having a business bank account is not enough.
It is very important to keep personal expenses separate from business expenses. Many new businesses make the mistake of comingling business transactions with personal ones. Lenders not only want you to have a business checking account, they may look closely at your transactions.
Online lenders or FinTech lenders often use sophisticated algorithms to analyze your bank statements to determine how your company manages finances. These algorithms can detect patterns in banking transactions that may indicate financial stress. When a small business uses funds to pay personal expenses, that’s a red flag and may indicate financial difficulties.
Research Loan Eligibility Requirements from Several Lenders
Understanding eligibility requirements can help you to set goals for getting your business loan approved. For example, you should find out what the minimum credit score is for the loan program you are applying to. If you are only a few points away from qualifying for a certain loan program, you could put more emphasis on raising your credit score.
Compile Company Records
For most small business loan types borrowers will likely be required to present financial statements, including: bank statements, tax returns and in some cases, a business plan. When applying for an SBA Loan, you may be required to produce several years of these documents.
If you are using an accounting software like Quickbooks, take time to update current accounting records.
On the other hand, if you are seeking a general purpose loan or a working capital loan from a traditional bank, the loan determination will depend on your credit report and other factors to determine creditworthiness. In addition, small business owners may be required to make a personal guarantee for repayment of the loan if the business defaults.
Other types of financing such as a merchant cash advance are unsecured financing programs that rely on future revenue of the small business. These tend to be unsecured funding programs.
Get Your Personal and Business Credit in Order
Once you have identified the type of loan appropriate for your business, you need to understand your credit report. In most cases, especially with regard to traditional bank loans, your eligibility will rely upon your personal credit score. Getting your business loan approved will be greatly enhanced as your personal credit score goes up.
Managing your personal credit history as well as your business credit scores is a process of best practices and requires time to improve, but the benefits can save a small business owner thousands in lower interest rates. Over time, with proper management, you can improve bad credit dramatically. Having good credit can have a very profound impact on interest rates and monthly payments.
Review your credit report to insure it is accurate and contains no errors our outdated information. If you find inaccurate or outdated information on your credit report, ask the credit reporting agency to remove it.
A significant component of your credit score is determined by how much of your available credit you are using. This is referred to as credit utilization. For example, if your credit limit on all your cards is $10,000 and you have balances of $5,000, your credit utilization is 50%.
If you are able to get your credit card issuers to increase your limit to say $15,000 or $20,000 then your credit utilization will go down to 33%, 25% and so on.
Your personal credit score (a good credit score) is a powerful asset when considering financing options. For example, the U.S. Small Business Administration offers loan programs that have the lowest interest rates and favorable repayment terms, but only lend to business owners with good credit scores and solid credit history.
Reduce Debt-to-Income Ratio
Your debt-to-income ratio shows lenders your ability to repay a loan based on current debt versus your income. Where possible, reduce your debt-to-income ratio by paying-off debts or increasing revenues. Keep in mind that certain debts are weighted more heavily than others.
Increasing revenue can be accomplished in the short-term by offering your customers quantity discounts at lower prices, thereby boosting your top-line sales. Similarly, you could offer clients extended payments for immediate purchases.
It is important to build revenue as much as possible prior to making your loan application. It might make sense to engage and accelerate any marketing programs to drive revenue as high as possible over several months before applying for any type of financing. The key is to paint a picture that shows cash flow and annual revenue sufficient to satisfy the eligibility requirements.
This is a key business metric that will have an impact on loan approval and repayment terms. This is also a significant component in your business credit score.
Maintaining a Business Bank Account
Most financial institutions as well as online lenders will require you to maintain a business bank account. But just having a business bank account is not enough.
It is very important to keep personal expenses separate from business expenses. Many new businesses make the mistake of comingling business transactions with personal ones. Lenders not only want you to have a business checking account, they may look closely at your transactions.
Online lenders or FinTech lenders often use sophisticated algorithms to analyze your bank statements to determine how your company manages finances. These algorithms can detect patterns in banking transactions that may indicate financial stress. When a small business uses funds to pay personal expenses, that’s a red flag and may indicate financial difficulties.
Research Loan Eligibility Requirements from Several Lenders
Understanding eligibility requirements can help you to set goals for most of the above criteria. For example, you should find out what the minimum credit score is for the loan program you are applying to. If you are only a few points away from qualifying for a certain loan program, you could put more emphasis on raising your credit score.
Compile Company Records
For most small business loan types borrowers will likely be required to present financial statements, including: bank statements, tax returns and in some cases, a business plan. When applying for an SBA Loan, you may be required to produce several years of these documents.
If you are using an accounting software like Quickbooks, take time to update current accounting records.
Mr. Kelly is an expert in online marketing, search engine optimization, content development and content distribution. He has consulted some of the top brokerages, media companies and financial exchanges on online marketing and content management including: The New York Board of Trade, Chicago Board Options Exchange, International Business Times, Briefing.com, Bloomberg and Bridge Information Systems and 401kTV.
He continues to be a regular market analyst and writer for forextv.com. He holds a Series 3 and Series 34 CFTC registration and formerly was a Commodities Trading Advisor (CTA). Tim is also an expert and specialist in Ichimoku technical analysis. He was also a licensed Property & Casualty; Life, Accident & Health Insurance Producer in New York State.
In addition to writing about the financial markets, Mr. Kelly writes extensively about online marketing and content marketing.
Mr. Kelly attended Boston College where he studied English Literature and Economics, and also attended the University of Siena, Italy where he studied studio art.
Mr. Kelly has been a decades-long community volunteer in his hometown of Long Island where he established the community assistance foundation, Kelly's Heroes. He has also been a coach of Youth Lacrosse for over 10 years. Prior to volunteering in youth sports, Mr. Kelly was involved in the Inner City Scholarship program administered by the Archdiocese of New York.
Before creating ForexTV, Mr, Kelly was Sr. VP Global Marketing for Bridge Information Systems, the world’s second largest financial market data vendor. Prior to Bridge, Mr. Kelly was a team leader of Media at Bloomberg Financial Markets, where he created Bloomberg Personal Magazine with an initial circulation of over 7 million copies monthly.
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