Applying for a small business loan can seem like a hassle, but funding is the fuel that accelerates the growth of your business. When you’re in need of working capital to run and grow your business, you consider approaching traditional banks, microfinance institutions, credit unions, and alternative lenders to secure financing.
However, not all entrepreneurs are able to access loans for small businesses. This is because of several factors that most lenders consider in your small business’ finances. Unfortunately, many businesses fail to meet the requirements that lenders need to approve their loans. Here is a look at the top things lenders consider before extending any type of financing to small business owners.
Ability to Fill Out the Application Properly
Not filing out your loan form correctly and as per the lender requirements will be an awful way to start. Messing up your application doesn’t mean you may not get the credit, but it shows that you’re not a responsible small business entrepreneur.
Before penning down any information in your application, make sure you read and understand the lender’s entire loan requirements. Before submitting it to your lender, double-check if all the written information is correct.
Your Personal and Business Credit Score
Ideally, the closer the score is to 750-800, the higher the chances of your loan application approval. So if you’re planning to apply for a loan for your small business, getting your credit score in order should be your priority.
Historical Record of Repayment
Your business’ history of timely repayments plays a vital role when you submit your loan application to a lender. If you have a good repayment history, you should get the funding you need. If your payment history has not been good in the past then it’s significant to prepare a letter of explanation to explain the reasons behind your poor payment history and show that problems have been corrected.
Paying your business loan EMIs and credit card bills in full and on time can help you maintain a good repayment history and ultimately get a better deal whenever you obtain another small business loan in the future.
Past and Present Cash Flow Situation
Lenders study the past and present cash flow statements of your business plan very closely. In addition to managing your day-to-day expenses, your current cash flow provides you the ability to repay your loan smoothly. Therefore, even if your business is making amazing profits, lenders consider favorably consistent high cash flows when reviewing your loan application.
To secure a loan for your small business seamlessly, you need to show your lender that you have enough cash coming into your business on a regular basis to buy inventory, pay bills, make payroll and of course repay the borrowed amount. Use innovative and advanced cash flow forecasting and management software like Smansha that can help you view, plan, and solve cash flow gaps in real-time.
Age of Your Small Business
If you’ve just made your dream business a reality, it might be difficult to secure a loan. When you have no track record of your business’ success, the lenders are reluctant to give you a business loan.
Generally, if you need working capital to fund your startup, most small business owners look to their own savings, family, friends, or angel investors. Lenders may be interested, though if you have an amazing personal credit score, a million-dollar business idea, or you’re applying for a secured small business loan.
Your Business Plan
A creative business plan not only helps you impress lenders and get approved for the loan but also keeps your business operation healthy and ahead of its time. Moreover, a solid business plan helps you focus on your target markets & customers, set priorities, manage cash, develop accountability, and prepare the business for the future, even for the challenging times. It shows the lenders that your business has the potential to attract new customers, boost revenue, make profits, and eventually repay the loan amount.
Available Collateral
Since most of the small business loans are secured, you have to put some type of collateral as security to get the funds. This is an asset that lenders may use to recover their money if you default in loan repayment. Some of the most common collateral include real estate, vehicles, equipment, cash, and blanket liens.
Before obtaining a loan for your small business, list all of your personal and business assets. If you have collateral whose market value is high, you can be successful in getting a big amount compared to an asset whose value is very low or has depreciated.
Bottom Line
So there are some of the many important factors lenders consider in your business finances. Make sure you look at all these points carefully and try to improve them before approaching a lender for your small business loan.
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