Do you need a loan to get your business up and running?
You’re not alone. About 43% of small businesses applied for business loans last year.
And of those, 66% were actually approved.
So in today’s post, we will break down the steps necessary to increase your chances of getting approved for business loans…
…and start that business you’ve been dreaming about.
Let’s get started!
5 Steps On How to Get Approved in Applying for Business Loans
Step 1: Evaluate your credit
At the end of the day, lenders will make the decision to loan, or not to loan, to you based on your credit profile.
As we’re sure most of you know, there’s personal credit and business credit.
But when just starting out, you have little to no business credit.
With that in mind, lenders will look at your personal credit and specifically your:
- outstanding loans, and
- credit report.
In conjunction with your personal credit, they will also review the financial standing of your business including:
- financial statements,
- business assets, and
- how long the business has been operating.
Now, we know what you might be thinking, “But I am just starting out and don’t have any of these things, plus I don’t have perfect credit either.”
Don’t worry, we have you covered. Starting first with your credit.
The key here is moving away from personal credit and starting to develop your business credit.
Business credit is very similar to personal credit. Business credit is the ability of a business to qualify for financing.
To build your business credit, the very first thing you need to do is register your business with the state.
We know a lot of people start as sole proprietors or general partnerships, in which case they are not considered separate from their business.
And therefore, no business credit can be established.
Instead, in order to build your business credit and increase your chances of getting business loans, you need to file the formal paperwork to legally establish your business.
This can be in the form of incorporating or forming an LLC.
Speaking of forming an LLC, we have a post that tackles the various LLC costs for you to establish your own LLC. So be sure to read it next.
Once you do this, you need to get an EIN or employer identification number.
This is 100% free on irs.gov.
Your business EIN acts like the SSN for your business.
While you are at it, you should apply for a Duns & Bradstreet or DUNS number and you can do so online at dnb.com
Duns and Bradstreet is one of the top business bureaus, and getting a DUNS number is critical in establishing and building your business credit.
Once you register your business and have an EIN, you can now open a business checking account.
This will help you further in establishing business credit by creating a clear separation between your personal and business transactions.
Check out our post that lists down the best business checking accounts that you can consider applying to.
A lot of times lenders request to see 3 or 6 months of bank statements as a way to determine how funded your business is at any given time.
So once your business account is open, start using it for all of your business transactions.
There should always be a positive balance and some activity every month.
Also, make sure to set up a business phone number, business email address, and professional website that is separate from your personal information.
Lenders will perform due diligence to see how reputable your business is.
If you have these things already established, you’re well on your way.
You’d be surprised to learn how many businesses actually don’t have an EIN, bank account, or even a professional email address.
Remember, we’re trying to establish that you are a separate entity from your business and that your business is legitimate on paper.
Step 2: Make sure that you have your financial statements in order.
The most common financial statements are going to be your balance sheet, cash flow, and profit and loss statement.
Lenders are going to analyze these statements in detail, so you want to make sure that your numbers are correct and complete.
Some lenders would prefer that your financial statements are audited by a CPA, but this can be costly for newer businesses.
An alternative is to instead have your financial statements ‘reviewed’ by a CPA which is a more affordable option.
If you want this affordable option, check out our accounting services here.
But if you don’t have financial statements, or have a limited operating history, you’ll need to develop financial projections.
Financial projections are a forecast of future revenues and expenses.
Typically, the projection will take into account external market factors. So, you’ll need to have a good understanding of your business and industry.
You should develop both short and long-term projections.
Your short-term projections should focus on your first year of business, while your long-term projections should account for the next 3 to five years of business.
Also, be sure to include charts and graphs to better illustrate your financial projections.
If your numbers are easy to understand or follow, the better chance you have in obtaining business loans.
You could hire a professional to do this for you, or there are plenty of free online templates to help you prepare projections.
Step 3: Determine how much funding you need to borrow and how you expect to use the funds.
Every lender will want to know how much you are seeking to borrow, and how you intend to spend the funds.
Is it for inventory? Hiring employees? Marketing efforts? Research and development?
Make sure to do thorough research in determining how big of a loan you need.
Requesting too little could lead to financial issues in the future, like running out of cash before you could complete your initiative.
Or, requesting too much could make the lender question your business altogether, and if you did proper research on your industry.
Creating your financial projections or even a budget will help you get clear on how much you’ll need.
Step 4: Assessing the value of your collateral.
Business collaterals are assets that can be seized and sold by the lender if you don’t make your payments.
And at the end of the day, a lender wants to make sure that they can get their money back.
So if you have collateral to show, you are way more likely to get approved for business loans.
Collateral can be equipment, inventory, real estate among other things.
Some lenders may not require collateral but may want a personal–which essentially puts your personal assets and credit score on the hook in case you default on the loan.
If you don’t have any collateral, unsecured business loans may be a better option.
Step 5: Research loan types and pick the right lender.
The most common types of business loans are:
- SBA loans – which is a government agency that partners with banks to guarantee a portion of your business loan.
- Bank loans – these are offered by banking institutions with repayment periods ranging from 6 months to 3 years or more.
- Equipment loans – are loans solely for equipment or machinery. These business loans use the equipment purchased itself as collateral. Similar to a car loan. These are available at some banks.
- Business line of credit – is similar to a regular credit card. As you repay the loan, the funds become available again to borrow.
- Microloans – are for loans generally up to $50,000. These are typically not offered at banks but instead by non-profit organizations or alternative lenders
Once you figure out which type of business loan is best for you, research lenders.
There are so many lenders (not just large banking institutions) willing to lend to small businesses, and the majority of them can be found easily online.
Here are some things to consider when deciding on a lender:
- Interest rates
- How much collateral, if any, do you have to put up for the loan?
- How long do you have to pay back the loan?
- Are there any additional fees?
- Are there any penalties?
- How long will it take for you to get funded?
Some general guidelines are:
a. Get business loans from the bank if:
- You’re not a new business and have been in business for at least 2 years.
- You don’t need cash right away.
- You have good credit.
b. Get a business loan from an online lender if:
- You’re a new business.
- You don’t have collateral.
- You need funding quickly.
c. Get a business loan from a microlender if:
- You’re a new business.
- You have bad or no credit history.
- You can’t get a traditional loan.
Once you’re clear on the type of loan and lender that is best for you, apply for the loan as soon as possible.
Applying for business loans and getting approval can sometimes take months.
Every loan and lender is different but in general, if you complete the first 4 steps mentioned in this post, you are already 90% on your way to getting approved for a business loan.
Is a Business Loan What You Need?
There’s something else we want you to think about is assessing if a business loan is what you need right now.
Here are some good reasons to get a business loan:
1. To grow your business.
Using a loan to expand your business is helpful in the long run since ultimately, you would be increasing your sales and cash flow by having a bigger business.
2. To buy long-term business assets.
Tying up cash to buy equipment or real estate may leave you in a cash deficit.
But if you’re using a loan to buy these assets, it can actually be a better setup for you as long as the assets are a good investment.
3. To temporarily improve cash flow.
If you’re in a seasonal business with predictable declines, then a line of credit could certainly help you meet your working capital needs.
It may not be a good idea to get a business loan if:
1. Your business has constant cash flow problems.
A business loan will not improve a continual decline in business. You would need to re-evaluate what your business is doing wrong from an operational standpoint.
2. You already maxed out your lines of credit.
Getting more loans will only negatively impact your business credit, and you’re less likely to get approved anyway.
It’s better to focus on paying down your existing debt before taking on more.
3. You can’t find any loan terms that suit your needs.
There’s no need to hastily getting into any financial trouble over loan terms that don’t serve you.
Take a pause, work on your credits and re-evaluate your loan option in a few months.
Now if you need more guidance for your specific financial situation, get our financial advisory services today!