Small business loan applications vary depending on the type of loan needed and the reason for borrowing. With modern automated approval systems in place, securing a small business loan may be difficult if all the criteria aren’t met.
Read on to ensure your start-up ticks all the right boxes to get approved.
What do banks check before giving a small business loan?
First, you need to understand what banks look for in an application. The following are all aspects that are considered by the bank for a small business loan.
This is the first thing the bank will do – check if you can afford the repayments with the amount of cash flow that your business brings in. You will need to authorize the bank to check your credit history. They will then calculate your debt service coverage ratio by looking at your income and the amount of debt you currently have. Usually, the minimum ratio is 1 to 1.20.
Banks will review the amount of money your company has to work with – in other words, your capital. The bank will need to review your business’s financial history and determine whether your company is well-capitalized and how much capital you have personally invested.
A lender will contact your references to see if you and your business have a good reputation. Make sure that your references are reliable and have good reputations.
Your credit score will also be evaluated. If there are any non-payments of debt, that could cause your loan application to be declined.
This is an asset such as property, business assets, equipment, vehicles, and savings accounts, among others, that the lender can fall back on if the borrower defaults on the loan.
As a business owner, this variable is something you won’t be able to control. The bank will look at the overall economic conditions and the conditions within your industry. If there are too many loans already in that industry, or the industry has high risk, then it is likely that your loan will be declined.
Here you will need to explain to the bank exactly why you need the money. The key here is to convince the bank that you don’t need it because you’re doing well on your own, but then give them the full run-down of what you would do with the money.
You need to have a clear plan of how much you need, how you will spend it, and how you will pay it back. Remember that the shorter the repayment period – the more likely you are to get approved.
How can I increase my chances of getting a small business loan?
Even if your business is doing well, the general chances of getting your business loan approved is very low because banks view small businesses as high-risk and the return on investment (ROI) may not be as strong. Here are some ways to increase your chances of getting approved:
Choose the right lender for your small business loan
Different lenders have different options and plans. Make sure you do enough research to find a plan and a lender that fits and works well with your business.
Don’t request multiple quotes from different lenders
Although this might contradict the above statement, it is important that you don’t request too many quotes. You can do research, but each time you request a quote, the lender might request a credit check – and too many credit check runs can make your business look desperate.
Review and improve your credit score
Not only your business’ credit score but your personal credit score. Any signs of non-payments are sure to send lenders running in the opposite direction.
Minimize negative balance days
Ensure that there aren’t any days where your business made a loss. If your business has a consistent cash flow, the bank sees that you can repay the loan you take out. If your business has an average of between three and five days of negative balance, the chances of getting approved will be much less likely.
Have a good debt-to-equity ratio
Again, the bank checks that you can repay the loan by calculating your debt-to-equity ratio. A good debt-to-equity ratio is 2:1. Anything higher than that, the bank will see as a risk.
Try alternative lender options
Alternative lenders are more likely to grant small business loans. Banks aren’t willing to take on any businesses that are a risk – they are filtered out with all the requirements.
You might need to provide a full business plan to the lender (if they require it). The plan needs to show that you have completely thought through the small business loan and how you will spend it. It will also need to reflect your business’s viability.
Getting a small business loan doesn’t need to keep you up at night. There are ways to improve your chances of getting a loan. Make sure you use all the above tips or contact us to help you in the right direction.