If you want to expand your business operations and go global, as many owners of small and medium-sized enterprises (SMEs) and startups do, chances are, you’ll need to take out some kind of a small business loan to develop new products or invest in new processes.
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But as you probably know, getting a business banking loan from a reputable financial institution can be a difficult task if you’re not ready for it. To improve your chances of securing loans for businesses, you’ll want to understand what it is that your lenders are looking for.
Do you comport as a trustworthy entrepreneur, and do you have good odds of being approved for your first small business loan? Consider the following factors when assessing your suitability for a loan program:
What Your Business Plan Is Like
Lenders will evaluate the strength and viability of your business plan when considering your small business loan application. Knowing that, ensure that your business plan is comprehensive and that it outlines your market analysis, competitive advantages, and financial projections.
You’ll also want to be able to highlight your repayment strategy of your loan. Your likelihood of getting approved hinges on how well your business plan is presented and how detailed it is, so be sure that it’s substantial and take some time to develop your presentation skills before applying.
Your Lender-Borrower Relationship
As is the case with personal loans, most institutions will not grant business banking loans to entities that they have not done much business with. For instance, Maya, a Philippine digital bank, exclusively grants certain no-collateral loans only to businesses that have had a history of using its services and technology solutions. Such practices serve to give the lending institution a better understanding of a borrower’s financial profile.
Your Credit Score
Your personal and business credit scores both play a significant role in determining your eligibility for a business loan. Lending is an inherently risky practice, and lenders use credit ratings to calculate risk and limit their risk exposure.
Before you apply for a business loan, prepare to demonstrate that you can pay your bills on time. You’ll also want to resolve any outstanding credit issues you have as soon as possible. Again, you’ll have the best chances of getting approved for a business loan once you’ve built a solid track record of creditworthiness.
Your Business Revenue and Cash Flow
Though they’re obviously important, good credit ratings and active relationships are not always enough to guarantee you a loan offer in the amount that your business needs. Lenders will also want assurance that your business generates sufficient revenue to repay the loan that they will offer.
Your financial reports will need to reflect consistent revenue growth and a healthy cash flow. In addition, you may need to have your books audited so that your lender knows that the cash flow reports they receive are reasonably accurate.
Your Ability to Provide Collateral
The larger or riskier your loan is, the more likely your lenders will be to require collateral to secure it. If you have valuable assets like real estate, a vehicle, equipment, or even jewelry, perhaps you’ll be able to increase your chances of securing a loan, albeit with a level of risk. A small business loan with collateral may be a good choice If you’re comfortable taking the risk on your assets.
Your Business’s Industry and Market Potential
Commercial lenders try to keep a close watch on market movements, as it helps them determine the risk presented by your business. Some lenders may not have such a deep understanding of your specific industry and market and may deny you loans to mitigate their risks.
In any case, industries with stable growth prospects and a positive outlook are more likely to get approved for loans. Regardless of where you choose to secure your loans, be sure to conduct market research to show your lenders. Present them with sufficient data that supports your potential for success in your home industry.
Your Business Experience
Lenders will also take into account the founding team’s collective experience. You’ll be able to instill confidence in your lenders regarding your ability to navigate challenges and repay the loan by demonstrating deep knowledge of your industry, relevant experience, and strong management skills.
Your Debt-to-Income Ratio
Would-be lenders will also evaluate your personal and business debt-to-income ratios to assess your ability to manage debt. Calculate this ratio by dividing your total monthly debt payments by your monthly income, and aim for a lower debt-to-income ratio to demonstrate financial stability and responsibility to your lender.
Your Purpose for Acquiring A Small Business Loan
When making a case for your small business loan, be sure to clearly define the purpose of the funding and how that loan will contribute to your business growth. Whether it's for purchasing equipment, expanding inventory, or launching a new marketing campaign, linking the loan to specific business goals will increase your chances of approval.
Your Track Record of Legal and Regulatory Compliance
Lenders will want to work with businesses that operate within the bounds of the law. Having proper licenses and permits assures them that they will have recourse in case you fail to pay them on time. As such, reputable financial institutions will not work with entities that have failed to meet legal and regulatory requirements.
Each lender has different eligibility criteria, so apart from knowing these factors, you’ll also need to research and compare various lenders. At the end of the day, the best way to ensure that you’ll be able to secure a business loan when you need to is to maintain strong financial management practices and develop consistent systems for your business.
Doing your due diligence will allow you to find a lender whose vision aligns with your business needs—and get approved for a business loan that will help your SME or startup gain momentum.
