Are you looking to secure a loan to grow your business? The numbers aren’t exactly encouraging when it comes to approval rates. Alternative lenders approve around 56 percent of small business loans, while traditional banks (who have less experience with non-collateralized loans) only approve around 27 percent.
Despite these somewhat disheartening statistics, there are several steps you can take to strengthen your application and make the best case for your business.
Keep in mind that lenders are essentially risk managers. When they review your application, they’re looking at the amount of risk involved when it comes to your ability to repay the loan. Follow these five steps to minimize the risk your business represents and improve your chances of approval.
Get Cash Flow Under Control
In the eyes of a lender, cash flow is king. The strength (or weakness) of your business’s cash flow is one of the main factors lenders consider when deciding whether or not to approve your loan.
Ideally, lenders are looking for a history of positive cash flow — when more money is coming in than going out. They want to see that you have enough money to cover all of your monthly expenses, with enough left over to comfortably make a hypothetical loan payment. Dips into the negative are a red flag that indicate risk.
Depending on the lender, anywhere from 90 days to 24 months of your cash flow history will end up under a microscope. It pays to get serious about cash flow management now so you can build up a history that lenders are comfortable with. Intuitive online tools can help you get a handle on your cash flow, and simplify analysis with visuals like charts and graphs.
Check Your Credit
Always check both your personal and business credit before you apply for a loan, and fix any errors that may be dragging down your score. Depending on the lender and the type of loan you’re requesting, one or both reports may be pulled as part of the loan approval process.
Your business credit will likely be taken into account if you’re applying for an SBA loan, or a loan from a traditional bank. If your business is new and has yet to build up business credit, your personal credit will often be taken into account, along with that of other majority stakeholders. In lieu of business credit, banks often judge your ability to repay the loan based on your personal score.
Not only will your credit scores affect your chances of getting approved for a loan, they can impact your interest rate should you get approved. If either your business or personal credit score is low (below 600 for personal credit), take steps to improve it before you apply for a loan.
If your credit is less than stellar and you don’t have the luxury of time to improve your score, you still have options. Alternative lenders are generally more lenient when it comes to credit scores, and often weigh cash flow more heavily when making their lending decision.
Know What to Ask For
Asking for either too much or too little can hurt your chances of getting approved for a loan, depending on the type of lender you’re working with.
Need a loan that’s less than $500,000? Traditional banks may not be your best bet. Historically, they tend to lend higher amounts — and have less experience dealing with loans that may not be backed by collateral.
Alternative lenders, on the other hand, are more likely to lend small amounts, and the application process can be much faster and easier. The key, of course, is to show these lenders that you can repay the loan (see number 5). To increase your chances of approval with these lenders, only ask for as much as you can comfortably pay back.
Know Why You’re Asking
Would you let a friend borrow $10,000 without knowing what it’s for? The same goes for lenders. A surprising number of applicants fail to tell lenders exactly how they plan to use the loan. Always define how you’ll put the capital you’re requesting to work to grow your business.
A convincing business plan is a great opportunity to remove any doubts a lender may have about your ability to repay the loan. Laying out a plan for the funds you’re asking for will go a long way to boost a lender’s confidence in your business.
Prove You Can Pay it Back
This common sense step goes right back to your all-important cash flow. When a lender scrutinizes your financials, what they’re really looking at is your ability to repay the loan you’re requesting. If you ask for an amount without showing exactly how you plan to pay it back, your application will likely land in the rejection pile.
Cash flow projections will go a long way to show a lender exactly how you’ll cover those loan payments. Fortunately, showing lenders where your business is headed doesn’t have to be difficult. Those same online tools that helped you analyze your past and current cash flow can help you create a future projection that you can hand over with your application to improve your chances of getting approved.
Guest Post: About the Author
Eddie Davis – As VP of Business Development at FINSYNC, Eddie has the great pleasure of introducing a world-class financial platform to partners ranging from financial institutions to accounting, advisory, payment and others parties interested in facilitating better business through automation and analytics innovation.