The thought of taking out a loan for your business can be intimidating. You know you need the money for your venture, but you’re faced with the daunting task of convincing a lender to approve you.
But don’t worry—with the right preparation and strategy, getting approved is possible. Ready to tackle the loan approval process? Today, we’ll talk about how to make sure you’re putting your best foot forward when applying for a business loan. From understanding the different types of loans available to building your credit score, I’ll give you all the tips and tricks on how to get approved for a business loan.
Determine the Type of Business Loan You Need
When it comes to getting approved for a business loan, the first step is to determine the type of loan you need. Depending on your situation, different types of loans may be available or more suitable. Loans can be secured or unsecured, short-term or long-term, and may come from banks, online lenders, credit unions, government agencies, alternative lenders and other sources.
To decide on the best loan for your business, begin by assessing your financial needs and situation. Factors such as the size of loan you need, how quickly you need it, and how long you’ll need to repay will help shape what kind of loan would work best.
It’s also important to understand the cost associated with each type of business loan in terms of both interest rates and fees. The terms and conditions of each will vary so make sure to read through them carefully before signing any paperwork. Additionally, some lenders may have specific requirements related to income level or credit score which can affect approval chances. Knowing these criteria beforehand will help ensure that your application is strong and more likely to be approved.
Build a Solid Business Plan
Having a well-thought-out and comprehensive business plan is a critical step to getting your loan approved. Not only does it tell potential lenders about you and your business, but it also helps you stay organized and aware of the steps you need to take to achieve success.
So what should go into this plan? It’s important to include information about your company’s history, its current situation, your goals, financial projections, the amount of capital requested, and the ways funds will be used. You’ll also want to provide details on your competition and any risks associated with pursuing the loan.
When crafting your business plan, make sure it’s detailed but easy to read—investors won’t have time to go through a framework of theories and numbers in order to understand it. And finally, keep your plan updated regularly—just because you’ve been accepted for a loan doesn’t mean you’re done with writing plans!
Check Your Credit Score and Credit History
Making sure that your credit is in good standing is important if you want to get approved for a business loan. We know it’s the last thing you want to think about, but it’s a must!
Before even applying for a loan, it’s important to check your credit score and credit history. The higher your credit score, the more likely you are to be approved for a loan. Your credit history also reflects on your ability to repay a loan, so it’s important to make sure there aren’t any red flags in your report such as late payments or unpaid bills.
You can easily pull your credit report for free from the major credit bureaus – Equifax, Experian and TransUnion — which will provide an overview of what lenders usually see when they check your report. This will also allow you to spot any errors before applying for a loan.
When checking your credit report, make sure you look for accuracy in the information provided and investigate any discrepancies. Contacting creditors or making other needed corrections right away can help ensure that lenders get an accurate picture of your financial standing when they review your application and can increase chances of loan approval.
Calculate Your Debt-to-Income Ratio
Getting approved for a business loan often comes down to understanding how lenders view your debt-to-income ratio and making sure it’s in a healthy range. To calculate your debt-to-income ratio, you’ll want to add up all of your current monthly debts, like rent or mortgage payments, car payments, and any other recurring monthly obligations.
Once you have that total, you’ll need to divide it by your gross income (your total salary before taxes). This number needs to be below 36% if you want to get approved for most business loans. If yours is above that threshold, there are a few steps you can take:
Boost Your Credit Score
Start by taking a close look at your credit score and seeing where it stands. Anything over 660 is considered good credit and will increase the likelihood of you getting approved for a loan. If the score is lower than that, start making on-time payments and paying off existing debt to boost your score.
Reduce Your Monthly Obligations
Consider stretching out the repayment timeline for any remaining debts so that your overall debt burden is reduced. You can also eliminate unnecessary spending from your budget—this will help lower your overall monthly expenses and reduce your debt-to-income ratio in the process.
Bottom line: A healthy debt-to-income ratio should be under 36%, so if yours is higher than that, take these steps to get it back in check before applying for a business loan.
Provide Financial Statements
When it comes to getting a business loan, one of the most important things you need to do is provide your financial statements. Financial statements are documents that show your financial activity—things like your income, expenses, assets and liabilities—over a certain period of time.
Having accurate financial statements can help you make more informed decisions when it comes to applying for a business loan. It shows potential lenders that you know what’s going on with your finances and are able to manage them responsibly.
Providing your financial statements in an organized way can also give potential lenders a better understanding of how much money you need and when you will be able to pay it back. Here are some tips for gathering the necessary information for financial statements:
- Collect all of your income and expenses for the past three months.
- Compile the information into an income statement and balance sheet.
- Update the documents on a regular basis, typically at least once per quarter.
- Keep careful records of any changes or additions made to the statement as they occur throughout the year
By providing up-to-date financial statements, you can make sure that potential lenders have all the information they need to approve a business loan quickly and easily — which will help ensure your success in achieving your goals!
Find Potential Lenders and Apply for Preapproval
Out of the many lenders out there, how can you pick the best one for your business? Well, the answer is to research multiple lenders and find one that offers tailored solutions for your specific needs. You may decide that you prefer a local bank or credit union, or choose an online lender that can provide faster access to funds.
Another important step is to get preapproved so you know exactly how much money you qualify for before you start shopping around for loans. Why? Because having preapproval will ensure that you don’t overspend and take on more debt than necessary.
To get preapproved, lenders typically require items such as:
- Business name and contact details
- Years in business
- Annual revenue
- A personal credit score and history
- Personal financials including tax returns and current debt obligations
- Business financials such as balance sheet and income statements
- Collateral that can be used to secure the loan amount.
By providing this information upfront, it can help make the loan process go much smoother, faster and increase the chances of getting approved for the loan.
Applying for a business loan can be a daunting task, but it doesn’t have to be. With a little know-how and the right approach, you can put yourself in a better position to get the loan you need to get your business up and running.
Create a detailed business plan, research lenders, be sure to have the required financial documentation and build a good credit score. All of this is essential to boost your chances of getting approved.
Finally, take your time in the loan process, and be sure to ask questions. It’s important to get all the information you need to ensure you understand the loan, so that you can make the right decision for your business.