According to Business Insider, 82% of start-up businesses close down due to a lack of cash flow. Entrepreneurs who want to avoid being a part of that statistic need to have a plan in place for obtaining financing to ensure that they have enough capital to back their idea up. Even if your company is financially healthy, small businesses will typically need to seek additional funding to take advantage of growth opportunities, such as acquiring another business or expanding a product or service line. Bottom line, financing is always crucial.
When it comes to small businesses, banks are more hesitant to lend to them because they typically haven’t been in business long enough to build a strong credit history and stable cash flow. Many entrepreneurs turn to alternative lenders and credit unions for help because they tend to be much more lenient when it comes to credit requirements. However, even with these lenders, there’s still no guarantee that you’ll be approved for a loan.
Fortunately, if you’re an entrepreneur or small business owner, there are some things you can do to improve your chances of business loan approval and make yourself a better candidate to score some great deals when applying for financing. Here are five ways to do it:
- Build Your Business’ Credit Score
One of the first things credit unions and other lenders will look at when evaluating a loan applicant, is the applicant’s credit score. Credit scores range from 350 to 850. The larger the number, the better your credit standing. If you want to qualify for loans with generous terms, a credit score of 670 and above is considered good.
The best way to build your credit score is to pay your bills on time. This may seem like a no brainer, but when you’re juggling multiple payments a month on top of all your other day-to-day responsibilities as a business owner, it’s not uncommon for payments to slip through the cracks. The best way to avoid this is to set up an automated payment system to pay your vendors and suppliers. This will allow you to schedule your reoccurring payments so they are automatically made on the dates you set them for. You won’t even have to think about it, and it will prevent you from missing payments which can hurt your credit standing.
- Be Clear on How You’ll Use the Money
When applying for financing, be sure to clearly state how you plan to use the money you’ll be borrowing. This includes the how but also the why. Why will this money help to benefit your business? Let’s say you’re seeking a loan to purchase a delivery vehicle. Explain to lenders why this vehicle will benefit the overall business operations and improve your bottom line. Painting a clear picture of how you’ll utilize the financial resource will help the lenders determine whether or not it’s a worthy reason to grant you the loan. If you’re giving them vague and generalized answers, your chances of approval will surely decline.
- Do Your Homework
When it comes to applying for loans, it’s best to be proactive. If there’s a finance company you’re interested in approaching, learn what their criteria is to qualify for a business loan before you apply. See if they have a minimum credit score or annual revenue that they require. If your company doesn’t meet the criteria, you may have to post pone your application until it does, or find a different financing company.
If you do meet the criteria, the next step is to make a list of the financing company’s requirements for documentation. It’s best to have all your paperwork finalized before you begin your application process so that when you apply, everything is as organized and streamlined as possible. In general, lenders require applicants to submit the following:
- Balance sheets
- Personal and business tax Returns
- Valid IDs
- Personal and business bank statements
- Business license
- Business plan
- Articles of incorporation
Ask around to see if the financing company you hope to work with asks for any other documents in addition to these general requirements as you’ll want to prepare those as well. For instance, a business lease or a copy of the collateral’s title. It’s essential to provide all requirements on time as it shows lenders that you’re prepared and responsible, which increases your chances of business loan approval.
- Be Ready to Offer Collateral or Personal Guarantees
One of the sure-fire ways to dramatically improve your chances of business loan approval is to present collateral. Pledging assets can come in handy, especially if your business isn’t in good credit standing. This provides additional security for the lenders because it gives them something they can use to recover the money you owed if you default on payments. Furthermore, presenting collateral improves your chances of be approved for a loan with better terms and lower interest rates.
The most common types of collateral businesses use include:
- Purchase Orders
- Real estate
If you don’t have any collateral to present, some lenders may accept a personal guarantee. A personal guarantee is a legal promise that the individual applying for the loan will repay the loan credited to them using their own personal assets if their business cannot afford to do so. A personal guarantee is a good alternative to collateral. If you do go this route, the lenders will evaluate your credit history so you’ll need to have a good credit score (670 or higher).
- Apply Early
Loans can take weeks to months to be approved, especially if you’re applying for an SBA loan. The loan facility has to conduct due diligence and examine your financial records before considering your loan application’s approval. Generally, the entire process takes anywhere from 30 to 60 days. If you’re planning on business expansion within the year, it’s better to start your loan application early. This way, you’ll have the resources you need by the time you’re ready to move forward with your plans.
Financing is a vital ingredient to the success of businesses. It’s worth noting that many start-ups have their loan applications denied the first time they apply. If his happens to you, don’t stop after one failed attempt. In fact, take that rejection as an opportunity to understand why you were denied so you can work to improve your odds for being approved in the future. Use the tips outlined in this article to make your business a better candidate the next time around.