A time will come during the lifespan of your business when you’ll need more money than you currently have. Some entrepreneurs need money at the very beginning of their business in the form of startup capital. An established business might need more money to pursue an expansion strategy or to take advantage of an opportunity in the market.
A profound business idea notwithstanding, most entrepreneurs and business owners need capital for a variety of reasons such as asset creation, risk redressing, invoicing and employee salaries just to name a few. The bankers, on the other hand, lend on the five Cs of credit: character, collateral, cash flow, credit, and conditions.
Interestingly, not all businesses that apply for a business loan will succeed in securing a loan. Irrespective of the quality of your loan application, some factors beyond your control can actually determine whether you’ll get a loan. For instance, a
Nonetheless, you can still take proactive measures to improve the odds of securing a loan in your favor. This article provides three straightforward tips that can level the loan application field for all businesses.
#1. You can’t be too prepared
Lenders want to see that you have a decent understanding of your business, your market, and your business finances. To start with, you’ll need a written business plan (not necessarily 100-pages) explaining why you need a loan and what you intend to do with the loan. You also need a cash flow projection of sorts showing how money is (or will) come into your business and showing how the money will go out of your business.
As you prepare your business finances prior to applying for a loan, you’ll also need to prepare your personal finances. Lenders will also want insight into the personal financial status of the business owner. The decision to approve/reject a business loan application is mostly a function of the quality of your business finances; yet, most lenders will reject an application if there’s something off about the finances of the business owner.
You must also anticipate how the banker will view your credit and risk profile. There are certain factors that need to be closely reviewed and carefully analyzed before applying for the loan. Here they are:
- Review your credit score and fix blemishes if you locate any
- Continuity of cash flow despite outstanding loans and debts
- Investors in the company – venture capitalists, strategic investors, angel investors
- Assets in the business
- Complete, correct and thorough financial statements
#2. Don’t ask for too little or too much money
A loan is a financial debt that must be repaid – there’s no point in being greedy or being “modest”, you must understand the art of getting a ballpark loan amount that meets your needs. Lenders provide credit facilities to hundreds of businesses; hence, they have quality insight into the average amount of money that similar businesses need at different points.
Hence, if you ask for too much money than other businesses typically want, the lender will be wary about lending you money. Asking for too much money than you really need increases the odds that you’ll waste the money on needless stuff and it would be harder for you to repay the loan. While presenting your proposal for the loan, you should avoid an apathetic approach. It is very important to convincingly demonstrate why you, rather than someone else, are a better candidate for the loan. In other words, exuding a passion and motivation goes a long way in securing a loan.
If you ask for too little money than you really need, you’ll run out of money before you complete the expansion or achieve your aims. When you run out of money, your business won’t grow properly and you’ll find it harder to repay your loan. Of course, you can borrow a lower-than-average amount of money, but the onus is on your to prove to the lender that you are expecting money from other sources.
#3. Don’t be desperate for a loan
Lenders are usually wary about lending money to businesses that are desperate for a loan because such businesses might go bankrupt if they don’t get a loan. Don’t wait until you need a loan before you start applying because you’ll already be in troubled financial waters before the lender gets around to making a decision on your application.
Lenders generally want to see that you have cash reserves of sorts and they will be more inclined to approve your application if you have built up your cash reserves over time. Interestingly, you get to borrow in the multiples of your cash reserves, having a $5000 can mean you typically qualify you for a $20,000 loan.
You should ideally know your burn rate and know how soon you’ll spend your cash reserves on operational expenses. However, if you wait until it’s too late to apply for a loan, you would have depleted your cash reserves, you’ll find it somewhat hard to make payroll, and lenders won’t want to borrow your money.
If unfortunately your loan application has been turned down due to the result of a search on your credit score, or not meeting any of the mandatory conditions for that matter, you shouldn’t keep applying in a hasty manner. You need to think through before applying for more credit. Any credit applications you make – successful or not – will show up on your credit file.
Getting a loan approval for your business may be a difficult feat but is an achievable one. It rests on your own shoulders and your skills to convince the banker that you are worth the risk that might be coming with lending the money. Thus, the above-mentioned tips can provide you a guiding path in order to increase your odds of getting a business loan.