It's likely that at some point in running your business, you'll need to secure a loan. A business loan can help you get through slow periods, expand to new locations or products, try a new initiative, buy new equipment or run an advertising campaign. Whatever the reason, once you've identified you need a loan, the next logical step is applying for one.
However, before you start applying, you’ll want to pause and make sure you’re in the best place to be approved for your loan. According to the 2021 Small Business Credit Report, approvals for business loans were down overall from 2019 to 2020.
- In 2020, only 37% of businesses received all the financing they applied for compared to 51% in 2019.
- Of the companies that applied for loans in 2019, 83% received at least a portion of what they applied for, while in 2020, that number was only 76%.
It’s clear that getting approved for a loan might not be as easy as it seems, but that doesn’t mean it’s impossible.
It’s important to ensure you’ve done everything you can to increase your eligibility for a loan before applying. These five essential steps can help increase your chances of securing the business loan you need.
1. Boost Sales Quickly
If possible, find a way to boost your sales quickly. When you apply for a loan, you’ll need to hand over all your financial documents. To increase your chances of being approved for a loan, you’ll want to show steady revenue growth. Typically, lenders like to see revenue growth of at least 10% per year to indicate consistent success.
Before you apply for a loan, give your business a month or two of increased sales so your revenue growth looks that much more impressive. You can do this by running a high-converting advertising campaign, offering a promotion on goods or services or partnering with a co-seller.
2. Create a Solid Business Plan
When you apply for a business loan, you typically have to show your lender your business plan. A lender wants to see that you’re a strong business with a clear vision. They’ll also want to understand what you need the money for and how it’ll help advance your business.
Your business plan should include:
- Profit and loss statements for the last five years (minimum)
- Profit and loss projections for the next five years
- Bank statements
- Cash flow information
- Balance sheet
- Business and personal credit scores
- Bank statements
- Copies of all necessary legal documents, such as your business license, corporate incorporation, contracts, leases and licenses or permits for operation
You’ll want to start your business plan with an executive summary. This should quickly explain your business’ advantage in the current marketplace, why you need the money and what you plan to do with it, as well as the future goals for your business. You should also address cash flow and explain how you plan to repay the loan. This shows that you’ve thought ahead when asking for this loan and have a plan already set to make payments.
When applying for a loan, it’s important to only ask for the amount you need. You need to justify the amount you’re asking for your in your business plan, so the more you ask for, the harder it is to have it approved. It’s best to be realistic and only ask for the amount you genuinely need. This also ensures you don’t take on more debt than necessary.
The executive summary is probably the most critical part of your business plan. It’s the first thing an evaluator will look at, and if they’re not impressed, they won’t move on to the other documents.
3. Check Your Credit Report
As we mentioned in step two, you’ll need to pull your personal and business credit score for your business plan. When you pull your credit reports, take a moment to evaluate them. According to the U.S. Federal Bank Reserve, applicants for business loans fall into the following categories based on their credit scores:
|Risk Category||Business Credit Score||Personal Credit Score|
|Low||80-100||720 or higher|
|High||1-49||619 or less|
This means individuals looking to apply for a business loan should have a personal credit score of 720 or higher, or a business credit score above 80. Don’t worry if you pull your reports and notice that your credit scores aren’t high enough. There are simple actions you can take to improve your credit, such as working with a credit repair specialist, paying down debts, decreasing your credit utilization ratio and paying your bills on time.
Individuals looking to access their credit report can turn to Ovation Credit Repair. Ovation offers 24/7 TransUnion credit monitoring, so you can be alerted any time your credit score takes a dip. Credit monitoring is incredibly beneficial, allowing you to act quickly to identify what’s impacting your credit and then fix it.
Once you access your credit reports and credit scores, you’ll understand what kind of position you’re in. If you know your credit scores are too low, move on to step four and fix your credit. Even if you already have excellent credit, you can always make it better, so consider step four to boost your score even higher.
4. If You Have Poor Credit, Fix It
If you don’t have great credit, know that you’re not the only one in this situation. The 2021 Small Business Credit Report found that 33% of discouraged applicants who didn’t expect to be approved for their business loan believed their low credit score would be the root cause of their denial.
While you can try to fix your credit on your own, it’s a time-consuming process, especially to take on while running your business. Luckily, professional services can help.
If you want to focus on improving your business credit score, consider using Nav. This user-friendly system helps owners build their business credit, so they can more easily acquire business funding. When you sign up with Nav, you’ll get credit reports for up to five businesses, the opportunity to build business credit with tradeline reporting and access to the FICO Small Business Scoring Service.
Once you’ve worked with a credit repair specialist, you’ll be able to bring your credit score up to where it needs to be for quick loan approval, and enacting solid financial habits will help you keep it strong. This includes paying down existing debts, setting up payments on auto-pay so you never miss a deadline and only using less than 30% of the credit accessible to you.
5. Invest in the Loan
If you don’t have time to wait for your credit to go up, you can apply for secure business loans or a secured business line of credit. You may be wondering, what is a secured loan? When a loan is secured, it simply means you have some form of collateral backing it. Lenders find these loans less risky because they know they’ll be able to collect something, even if the borrower goes into default. A small business owner may opt for a loan secured with all business assets, so the lender can collect and sell the business equipment or business property if you default on the payments.
Alternatively, a business loan can be secured with capital from the business, cash from the owner’s personal savings or even with the owner’s personal assets, such as a house. Individuals with poor credit can opt for a secured loan, making the lender feel more comfortable with approving the loan.
Lendzi Helps You Get Your Business Loan
It’s essential to understand that the big banks aren’t your only option for small business loans. According to Finder.com, more than half of all business loan applications in 2020 requested $100,000 or less. Businesses that were looking for loans above $100,000 tended to apply with larger financial institutions, such as banks. However, for smaller loans under $100,000, the majority of applicants went with online lenders.
Lendzi helps you take an educated approach to acquiring your business loan. Our platform helps business owners compare lending options and get funded quickly.
While traditional banks have firm policies for approving loans, online lenders tend to be more willing to look at all aspects of an applicant. For example, an online lender may look past a poor credit score if they see the business is doing well, there’s a solid business foundation and collateral has been offered.
We’ll evaluate all the lenders out there for you — even online lenders you may have never heard about but could be the perfect fit for your needs! Let us help you find the right lender.