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Most small businesses have difficulty getting financing. So, before you approach lenders, make sure you ask yourself how you can maximize your chances of getting credit approval. There are a few simple things you can do to increase your chances of getting approved for funding.
Demonstrate that your business generates steady cash flow
Cash is king and a predictor of a business’ health and prospects for the future. By being able to demonstrate you have ample and/or steady cash flow, you are ensuring to potential financers that you have plenty of money to pay creditors, employees and others on time. Make sure to be clear and show your financer what predictable cash flow you have coming in. You can demonstrate this by being ready to provide financial statements, tax returns, and bank statements. These documents provide the finances with a historical perspective of the performance and liquidity of the business. Be prepared and ready to answer questions about any fluctuations that you have in your cash flow. For example, if your cash flow dipped because of an economic reason or the loss of a customer, provide an explanation for that in advance.
Maintain a manageable debt load
Debt load is the amount of debt that is carried on your balance sheet. You need to be able to demonstrate you can not only handle your current debt load but also the additional debt repayment your proposed financing will cause. Be prepared to demonstrate why incurring additional debt to expand your business will be beneficial.
Have a positive payment history
One of the most important factors is the payment history of the business. A financer needs to see that a business can pay down debt in a timely manner. They have obtained a credit report of your business on a third-party site such as Dun & Bradstreet. If so, ask to see the report to make sure that everything on there is accurate. The report may not mention your significant trade partners and other lenders who would provide a good reference and confirm your good payment history. You can provide these references and include the contact information for the person you deal with at your bank, trade supplier, and more.
Keep your documents in order
The application process will be more seamless if you take the time to keep your financial, accounting and tax records up-to-date and accurate. Make sure your business has a system in place to keep everything organized. Consider hiring an accountant to help you as well.
Prove business judgement
Potential lenders want to be assured that you anticipate potential challenges and have a plan in place as to how to address these challenges. Lenders also want to see that you have the management in place necessary to overcome any obstacles that come your way. It is recommended that you have some type of business plan that you can show the lenders. This business plan should have information for your business such as how you expect your business to perform if you do not get approved for financing, and how your business will perform if you do.
Shop around for financing
Do not assume that the first bank or vendor you find will offer the best rates and terms. Compare rates, lease terms, fees, and options and use only established financing providers. There are pros and cons that come along with every lending institution. Large banks are often preoccupied with bigger clients, because larger loans mean larger profits. While they might be willing to finance your business, you could potentially get more attention or more favorable terms at a smaller bank. Shop around for financing.
The Bottom Line
Small business loans are available from many different lenders, and there are tons of choices that are tailored to different types of businesses. You can increase your chances of obtaining a small business loan by anticipation what lenders will review and require.
