Many companies rely on a business loan to get started and will apply for more as financial issues come up over time. There’s absolutely no shame in needing a loan to get your small business off the ground – in fact, many banks are jumping at the chance to help promising businesses get their start. But the process of getting approved can be a little tricky. Here are a few tips to keep in mind as you apply for a business loan.
1. Get Your Business Ready
There’s an entire checklist of items you’ll need to complete before your business will be ready to apply for business loans. Jumping into the application unprepared is a good way to waste time and set your business back even further, so don’t try flying by the seat of your pants for this one. Your business needs a solid foundation, a legal entity, some amount of credit, and various specific qualifications depending on the loan you want to apply for.
As your business becomes more ready for the loan application, it’s time to research where you want to apply. You’ll need a realistic understanding of how banks are going to see your business. For a bank to approve a business loan, they need to believe that your business is capable of earning enough to pay off each loan payment consistently. They’ll be looking at every aspect of your business with this in mind, so it’s important to approach readiness holistically.
2. Personal Credit Score
For small businesses that are just starting out, banks will often look at the business owner’s personal credit history to establish credibility. After all, as the owner, you’ll be the one making the payments for your business each month, so your personal history is relevant. In order to see whether your personal credit history will make the cut or not, you’ll need to have a look at your credit score. Many times, banks look at your personal credit history before they even open your application. A good score tells them your application is worth their time to read and assess. A bad one will tell them not to waste their time, since you can’t be relied on to make regular payments.
You can also look into how high or low of a score your specific banks are looking for so you can work on your personal credit as you approach the time to apply.
3. Established Business
Another aspect of business that banks will look at is your ability to maintain a consistent flow of revenue. If you’re relying 100% on the business loan to get by, you won’t be able to make payments regularly. They’ll look at your past and current sales, and will likely ask you what your financial situation will be a few years down the road. You have to be ready to answer difficult questions about unpaid invoices or other financial discrepancies.
In addition, banks may be unwilling to give you a loan if your business is too recent. Startups often have a hard time getting loans for this reason. Banks want to have proof of your business’s viability – how can they know how successful your business is if it’s only a month old? Different banks will have their own definition of an established business, so that’s another factor to look for when deciding where to apply.
4. Loyalty Matters
If you already do the majority or entirety of your business banking with one bank, consider turning to them for your loan applications. A good relationship with the bank will undoubtedly benefit you and make your application more likely to be approved. This is because your bank has (hopefully) already seen evidence of your ability to make regular credit payments and stay on top of your finances.
The Main Takeaway
Existing relationships are always a good place to start when making business decisions. Don’t hesitate to look at what you already do well as a business when preparing for a loan application.
