Securing a business loan is a major challenge facing small businesses, this is mainly due to the tight lending standards set by financial institutions (banks). Most of the time, new entrepreneurs gets denied when applying for a loan. While others may be successful with their loan applications, they may find themselves dealing with terms and conditions attached to the deal.
Obtaining external financing is often necessary to start or grow a business or take care of day-to-day expenses such as inventory and payroll. In securing an application, entrepreneurs or business owners must realise that both banks and investors operate under standard principles when lending money to businesses. Well, it’s pretty evident that finding, applying and approving
To help you out, here are some few tips that are sure to up the odds of getting your business loan application approved.
Present A Solid Business Plan
This is more applicable to new business owners. A good business plan is one of the strongest weapons against loan application denial. It’s a no-brainer to know that financial institutions will require a business plan along with the loan application. The business plan should be broad and also include relevant information on both past and present financial statements. It should also include a detailed market analysis for the business as well as your overall experience that particular industry. Also, the value of assets to be used as collateral should be clearly stated.
Prove The Earning Capabilities Of Your Business
When it comes to securing funds for your business, cash is still the key deciding factor. Cash is the primary predictor of a business’s health as well as the prospects for the future. If you can successfully demonstrate that your business has steady cash flow, you are assuring potential lenders that you have enough money to pay employees, creditors and others without delay. You can show this by being able to provide relevant documents such as bank statements, financial statements and tax returns. These reports supply the lender with a historical performance of the liquidity as we as the performance of the business. You should also expect questions about fluctuations in cash flow such as if the flow reduced due to loss of a customer or recession. Be sure to provide an explanation in advance.
Be Sure To Have a Positive Payment History
One of the most crucial factors any financial institution is sure to consider is a business’s payment history. Lenders need to see and confirm that a business has a clear record of paying down debt and not just paying but paying on time. Also, there’s a high chance that the financer may have collected a third party credit report on your business. Be sure to ask to see and verify the accuracy of the report. There is a possibility that the report may exclude or fail to mention your significant trade partners and other lenders who would provide a positive reference and attest to your good payment history. You can prove this by supplying these references and remember to include the contact information for the individual you deal with at your trade supplier, bank, etc.
Maintain a Reasonable Debt Load
It’s imperative that you demonstrate your ability to handle both your current debt load as well as the additional debt repayment your proposed financing will bring. To give you a better understanding, the debt load is the amount of debt that is provided on your balance sheet. So, if you plan to incur the debt for developing or expanding your business, be sure to demonstrate why or how this additional debt will benefit the business. For instance, show how the added funds will be used, and foretell the additional revenue that will be generated as a result of the supply of cash. The use of gain or income from the loan is a paramount point of information to the lender.
Confirm The Economic Conditions
One of the conditions that may likely affect an investor’s decision to approve your application is the overall economic climate during the period of application. It’s pretty obvious that banks will view tight economic conditions as a challenge for any entrepreneur to pay back the investment. Moreover, periods of economic recession also implies that banks will have a harder time approving every loan application they come across. So be sure to know the economic conditions before applying for a loan. This is crucial!
Demonstrate Business Judgement
Potential lenders will also like to be assured that you expect potential challenges and have a plan in place to address the problems. Moreover, lenders or investors are also interested to see that you have management in place that’s good enough to overcome any situation that might come your way.
Review Borrowing Options
It’s in your best interest to consider all the commercial banks at your disposal. While most people tend to be attracted to large national banks, regional institutions should guarantee a priority spot in your prospective list. It’s also noteworthy to mention that your chances of getting a loan are much higher when you approach small commercial banks.
Well, there you have it. These are a few tips that can increase your chances of securing necessary funding for your business. All in all, being successful in your loan application demands transparency with all your relevant financial data. Overall, you should be a confident entrepreneur who has strategically planned out the business in all its fundamental aspects.