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CEO & Founder of National Business Capital, the leading FinTech marketplace offering streamlined small business loans.
Applying for a business loan can be a daunting experience, especially given the current business landscape. Banks have been gradually tightening their lending standards amid the continued Fed rate hikes.
Securing a loan for your business is never easy, but companies have a higher bar to clear right now. One survey found that 49% of banks tightened their lending standards for small businesses in Q2 2023, while almost 51% tightened standards for large and medium-sized companies.
That’s why it’s more important than ever to be proactive and take steps to increase your likelihood of receiving a business loan. Understanding what lenders are looking for can boost your odds of approval.
Have A Detailed Plan For The Money
When you apply for a loan, you should explain how you plan to spend the money, regardless of whether your lender asks or not. Without a strategic plan for how you’ll spend the money, a loan is unlikely to move the needle in your business.
For example, you can specify whether the funds will be used to purchase equipment, pay employee salaries or fund a business expansion. You can also explain how these funds will help your business’s short-term and long-term growth. This specificity will also help you evaluate potential business loans and determine whether the interest rates and terms you’ll receive would be worth it or not.
Improve Your Credit
Lenders look at your business credit when evaluating the financial strength of your company. Different lenders have different credit standards, so depending on the type of lender and its requirements, you may qualify for a business loan with average or no business credit.
Still, a strong credit score improves your approval odds and may lead to better rates and terms on the loan. If you’re using the Paydex score, 80 to 100 is considered strong. Anything above 700 is strong for the FICO system.
If you don’t have any business credit, you’ll start by applying for a free D-U-N-S Number with Dun & Bradstreet. This is a nine-digit number lenders will use to look up your company’s credit profile.
Try to only take out loans or lines of credit from lenders that report to business credit bureaus so you can build credit during your repayment. You should also make sure to pay your bills and loan payments on time since your payment history is one of the most important factors determining your business credit score.
Gather Your Business Documents
If you’re applying for a business loan through a bank or credit union, you’ll need to provide extensive documentation. You can get ahead of this process by preparing the following documents:
• Bank statements: Bank statements help your lender get a sense of your business’s monthly cash flow and ability to repay the loan.
• Income statements: These help your lender gauge your business’s profitability over time. By looking at your sales volume and profit margins, your lender can determine whether your business model is sustainable or not.
• Tax returns: You’ll also need to provide your most recent income tax returns so your lender can see your income and debt-to-income ratio.
Get A Handle On Your Cash Flow
When you’re applying for a business loan, you need to show that your business has stable cash flow. Lenders will see your business as more of a risk if your cash flow is inconsistent.
Getting a handle on cash flow is a pain point for most businesses, especially if you have high upfront costs. You can improve your cash flow by forecasting your short- and long-term business expenses and staying on top of your accounts receivable. It’s also a good idea to enlist the help of an accountant.
Have A Strong Business Plan
A solid business plan walks you through each stage of starting and running your business. It’s a road map for how you’ll structure and grow your business, and it’s crucial if you want to receive small-business funding.
A traditional business plan format includes an overview of what your company does, how it will be successful and your mission statement. You should include a detailed description of the products and services you plan to offer and who your target customer is.
You’ll also want to include a market analysis, marketing and sales plan, and financial projections. You should also include any relevant legal documents.
Consider Alternative Lenders
Some business owners prefer to apply with a bank or credit union since they tend to offer the lowest rates and best terms. However, in 2023, non-bank interest rates are becoming more competitive with banks’ rates.
Non-bank lenders have gained popularity over the past decade, and the current credit conditions are shifting borrower attention in their direction even further. Using an alternative lender can help you avoid a drawn-out application process allowing you to access growth capital more quickly.
Improving your loan approval odds with alternative lenders involves using many of the same strategies as for banks. Banks and credit unions generally care more about credit scores than non-bank lenders, but it’s still worthwhile to proactively strengthen your credit as you plan to apply for financing for any type of lender.
You should also ensure that regular deposits are made into your business bank account throughout the time leading up to your application. Have a good understanding of your numbers, and develop forecasts/projections to definitively show that your business is trending upward.
Regardless of the route you choose to take, getting approved for a small-business loan isn’t easy. It’s all about cleaning up your finances and positioning yourself to qualify for the dollar amount you need. Both types of lenders have differing minimum requirements and unique characteristics that determine their respective value for businesses. By working with the right one for your business and goals, there’s no need to “improve your odds” of approval because you’re working with an organization that fits your business and where it’s headed.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.