Step By Step Guide: How to Apply for a Business Loan and get Approved
Business Loan Approval
Why are Business Loans Important?
Are you looking to start your own business? Business loans can help facilitate cash flow
With unemployment and job redundancy on the rise, an increasing number of people are turning to small business entrepreneurship as a means to earn a living. Once you have decided that you are interested in starting your own business, the next step involves organizing the required amount of capital for your business. A healthy, unimpeded cash flow is a necessity for a new business to find its feet.
Although the lending climate is still harsh, there are always lenders available to forward the required funds for small business start-ups.
You will need to borrow credit as all businesses require an initial investment to get off the floor. Unless you plan to invest your own savings (not recommended unless you happen to be super-wealthy!), you will want to secure business financing at favorable rates. Although, it takes time to navigate the lending market, your ultimate objective is to find a lender willing to approve your loan at favorable terms.
How does a Business Loan Help?
The capital amount should be able to tide you through the initial phase until your business begins to show profits.
You may want to secure business financing in order to:
- Start a business right from scratch
- Buy an existing business
- Expand an existing business
- Purchase a franchise
- Manage specific industry related costs
Lenders perceive you as a person who can be trusted to repay a loan.
What is the Loan Amount that you need for your Start-up
Business loans could vary from as small as $5000 to $5 million. While banks do have a preference for large loans (they make more profit), there are several organizations including the SBA (Small Business Administration) along with other lending institutions like credit unions, micro-financing units etc who will be happy to lend you the money.
Take a pen and paper or use an Excel sheet to work out exactly how much you want for your business. To improve your chances of success, it’s important to have a clear idea of the costs involved to help your business stay afloat during the initial phase.
The following factors should be taken into consideration while calculating costs:
- Registration, licenses and permits
- Machinery, office furniture, cash registers, refrigerators, air-conditioners etc
- Insurance including public liability, vehicle insurance, income protection etc
- Rent/lease agreement for commercial property
- Computers, phones, Internet, staff uniforms
- Signage, advertising, letterheads
When you calculate costs, it’s a good to overestimate them. Consider dividing up costs as ‘one-off costs’ (office furniture, machinery etc) and ongoing costs (staff salaries, utility bills etc) to give you a clear idea of your budget.
What is a Business Plan and Why you need Collateral
Present a detailed and practical plan
When a lender processes your loan application, he will want to know exactly how to you plan to utilize the loan. Important details include the nature of the business, the size as well the purpose behind the venture. You should also back up your application by describing the experience and skill levels of all the partners. This tells the lender that you have the expertise and skills necessary to run the business successfully.
In addition, another important factor that needs to be included in the plan is information about collateral. Collateral is defined as property or assets used to secure a loan or financing. In the unlikely event that you are unable to repay the loan, the lender will use the collateral to satisfy the loan. Most business loan providers will require proof of collateral which could include business (machinery, office furniture, vehicles) as well as personal assets (house, car, jewelry).
However, some lending institutions such as SBA may approve the loan despite the borrower’s inability to produce sufficient collateral. If you have a respectable credit rating, it will tend to tilt the balance in favor of the borrower.
Documentation Required while Applying for a Business Loan
You might want to ensure that you provide the following documents along with your business plan.
- Both business and personal credit history; you could consider including recent credit reports. If there multiple partners, you may want to submit separate credit reports for each individual
- Bank and financial statements serve as documented evidence of your financial health
- Cash flow projections for the next 12 months. Cash flow projections indicate (with the help of facts and figures) inflows and outflows of money during a specific period. In addition to helping you procure funding, cash flows also help anticipate emergencies and prepare for the coming year. It’s important to realize that cash flow statements/reports are different from cash flow projections.
A well-laid out cash flow projection will indicate that the proposed business venture is a worthwhile credit risk.
How to Select a Suitable Business Loan Lender
The biggest challenge is to choose a suitable lender for your purpose. Business loan providers offer different rates of interest and repayment terms. For example, a lender may offer lower rates of interest but may insist on a shorter repayment period.
The new buzzword in business loan circles is ‘cross-selling’. This means when the lender approves your loan, he also gets to issue, say, your business credit cards or operate your treasury accounts.
Here are a few tips to choose a business loan lender:
- If you have borrowed and repaid a loan before, try the same lending institution; lenders are more likely to approve a borrower whom they are familiar with
- If you want a small loan, large banking corporations may not be a useful choice; they usually prefer borrowers looking for big loans
- You may want to talk to a lending officer before meeting prospective lenders. A lending officer will be able to update you on the current rates of interest in the market, the types of business loans available and the best lenders to deal with
- You can try approaching credit unions and community banks; they are more likely to approve small loans
If you face a rejection from the lender, try and find out the reason behind the rejection. If the application has been rejected due to missing information, then resubmit the application with all the required information filled in. Alternatively, try other lenders. For example, if your loan was rejected by a commercial bank, you might want to submit your application to community banks or credit unions.
How Credit Rating can Influence Business Loan Approval
Your credit rating plays a significant role in getting your business loan approved. Lenders do not expect that you have never borrowed credit before. They are on the look-out for borrowers who have a history of prompt repayment of loans and credit. It does not matter if you have borrowed credit (even several times) as long as your credit report reflects that you have managed to plug all your loans within the stipulated time period.
As a matter of fact, you might want to be aware that borrowing credit and repaying it punctually can help boost your credit rating.
How does your credit rating affect your chances of approval?
Banks and SBA view credit rating as a barometer of your ability to manage finances. Thus, a low credit score will indicate that you represent a higher risk. There is a strong likelihood that your loan application may get rejected but not necessarily so. You may have been unable to repay a previous loan due to adverse circumstances. In that case, your loan may get approved despite a bad credit score.
Business Credit Scores
Business loan lenders also refer to agencies for your credit score. But business credit scores work on a different scale than personal credit ratings. Business credit scores run on a scale from 0 to 100 and is calculated on various factors including credit history, business information, banking and insurance information etc. As a general rule, business credit scores above 75 are considered as good credit risks. It’s common for prospective business loan lenders to want to see both business and personal credit scores.
Avoid trying to over-inflate cash flow projections- prepare an application and business plan that is well-supported with facts and figures to back it up.
To maximize your chances of approval, make sure you ask the lender the documentation and details that that they require. You might also want to be aware that banks will not approve loans for speculation (on stock trading etc), gambling or passive investments.
The key to getting approved for business loans is transparency, honesty and thoroughness. You might want to be upfront and open about your financial history. It’s important to be able to view the transaction from the lender’s perspective. Business loan lenders have in-depth knowledge about how businesses run and have a fair idea of what will work.
A complete, detailed and honest business loan application has much higher chances of getting approved.