- A review of the factors that lenders look at in loan application
- For those starting or expanding a business
- Improve your chances of getting a loan
When you apply for a business loan, you should be prepared for the lender to review much more than just your credit score. You’ll need to be prepared to answer questions about how much you plan to borrow, how the loan proceeds will be used, how you plan to repay the loan, and what collateral you can offer.
When a loan makes sense
A business loan can be useful to both new and existing companies. It can be a good idea to get a loan if you’ll use the funds to invest in any assets that can generate revenues over a long-term period, expand your business without drawing down your capital reserves, or improve your cash flow if your accounts receivable are frequently delayed. A loan can also help you establish your business credit.
Business loans are less advisable if you’re already carrying a significant amount of debt, have a poor credit score, or can’t find a loan with favorable terms. You also shouldn’t seek a loan just to prop up an inadequate cash flow, as this won’t resolve any underlying problems with your business model.
You might consider alternatives if you decide a business loan is not suitable for you. These could include peer-to-peer lending, a business line of credit, or using a business credit card.
What a lender needs to see
With any loan, a lender is going to scrutinize your credit report to see how well you have managed your finances in the past. While an occasional late payment won’t betoo concerning, major issues such as foreclosures or delinquent accounts will raise red flags. It’s important to pull your credit report before you apply to see if there are any mistakes or other issues that need to be resolved.
When applying for a business loan, the lender will want to see your business plan. This document is a useful way to demonstrate what your company will do and how it will be run. A robust financial section is especially important, as this will show how you plan to spend the money from the loan and how you’ll earn enough to pay back these funds.
A lender will provide the full list of information they need to review before making a decision on the loan application. Some common requests include details on your company’s finances, including debts, profit and loss statements, tax documents, accounts receivable, and accounts payable; information on your personal finances; and information on any insurance policies you have for your business.
Some lenders may ask that you provide some form of collateral to back up your loan, such as inventory or a portion of your accounts receivable. Be careful about offering personal assets, such as home equity; any collateral should be something you’re willing to lose.
How to improve your chances of approval
Your request for funding shouldn’t be open-ended. Provide a specific sum you’re looking to acquire from the lender.
You can improve your chances of getting a loan, or getting approved with more favorable terms, if you can reassure the lender of your ability to pay. Some options for doing so include making a larger down payment or seeking a loan with a shorter term. Of course, you should also have the financial resources to meet the monthly payments if you pursue this option.