How Strong Is Your Business Loan Application?
We all like to know that we are succeeding in our endeavors. It’s easy to tell how successful you are when exercising — just pull out a scale or a measuring tape. It’s equally easy to judge a successful work day by how many items you checked off the good ol’ planner. But when it comes to loan applications, how do you know when you’re ready to submit it?
What if I told you that you could measure how likely your loan application is to be approved before you sent it? While there’s no sure-fire magic secret to ensure your business loan application gets approved, there are ways to tell how strong your application is and how likely lenders are to accept it. In this post, we’ll cover seven ways to measure the strength of your business loan application.
Before sending your loan application, check how it stacks up in these seven areas first…
Table of Contents
A Clear Plan
Lenders want to know exactly how you plan on using a loan if approved. For this reason, it’s incredibly important to explain in detail how you plan on using the funding to grow your business.
If you ask a lender for $100,000 and don’t give a reason for the loan, there’s no chance you’re getting that money. Instead, provide a specific reason for the funding. For example, you may need $100,000 of new equipment that will increase your company’s productivity, allowing you to take on 100 new clients.
Common reasons for business loans include:
- Hiring new employees
- Purchasing inventory
- Purchasing equipment
- Expanding your business
- Buying property
The more detailed you can be on your application the better. Some lending experts even recommend adding a detailed business plan to your application. A business plan will show that you are prepared, organized, and knowledgeable about your business field. When it comes to getting approved for a loan, these extra brownie points could make the difference between securing a loan and being declined.
Double check your loan application to make sure it clearly explains what you need the money for and how your business will benefit from this loan. Also, make sure you are asking for a reasonable amount for your business’s specific purposes. If your business loan application can demonstrate a clear plan, you’re off to a great start.
The 5 C’s Of Credit
A strong loan application will highlight the 5 Cs of Credit. But what are the 5 Cs of Credit?
The 5 Cs of Credit are a measurement that lenders use to judge the trustworthiness and creditworthiness of a potential borrower. If your loan application doesn’t display these traits, then most lenders view you as high-risk and decline your application entirely.
Here is a basic breakdown of the 5 Cs of Credit and what lenders are looking for on your loan application.
Character refers to your business’s reputation. Lenders want to see that you pay your debts on time and are trustworthy.
To judge your company’s character, lenders will often check your credit history, your business credit score, and your personal credit score. They may also try to gauge your personal character through social media, references, or a phone consultation.
A loan application with strong character will have:
- A good credit score
- A record of on-time payments
- Sound references (if required by lender)
If your application doesn’t demonstrate these qualities, read our post 5 Ways To Improve Your Personal Credit Score.
Capacity refers to your business’s ability to pay back the loan. Lenders want to be assured that you have the cash flow to actually afford loan repayments.
To judge your company’s capacity, lenders often view your cash flow statements, bank statements, income, and existing debt.
A loan application with strong capacity will have:
- Strong cash flow
- Enough income to cover monthly payments
- Minimal existing debt
Capital refers to how much money you have invested in your business. Lenders view owner’s capital as a sign that you “invested” in your company’s success and are then more likely to do whatever it takes to make your business succeed (which for lenders means paying back your loans).
To judge your capital, lenders view how much is invested as well as how it has been invested.
A loan application with strong capital will:
- Show the total owner’s investments
- Give detail on how those investments have grown the company
We understand that not every business owner has invested personal money into their business. Read our post The 5 Cs of Credit: What Lenders Look For to learn how you can still impress lenders without owner’s capital.
Collateral refers to any assets that are offered up as insurance should you default on the loan. Many lenders require collateral as a safeguard that they won’t lose everything should you be unable to pay your loan.
To judge your company’s collateral, lenders may vary. They may require specific assets or a blanket lien or a personal guarantee.
A loan application with strong collateral will:
- Understand their specific lender’s collateral requirements
- Provide the proper collateral
- Include any paperwork associated with the collateral
Conditions refer to the conditions of the loan as well as those of the current economy. Lenders want to make sure that you can afford a loan.
To judge your company’s conditions, lenders will not only evaluate your loan application but also the details of the loan you are applying for (such as borrowing amount, interest rate, etc.). The economy and your business’s current market can also play a role.
A loan application with strong conditions will:
- Have enough income to cover monthly payments
- Demonstrate an understanding of their industry, current market, and competitors
Ultimately, the 5 Cs of Credit are a great way to determine how strong your loan application is. Make sure your loan application highlights your company’s character, capacity, capital, collateral, and conditions. If your business application demonstrates each of there traits, you are well on your way to getting the loan you want.
If you want to tips about how to master the 5 C’s of Credit, read our post The 5 C’s of Credit: What Lenders Look For.
Strong Cash Flow
For lenders, it’s all about being certain that you can pay your loan back on time and in full. Your business loan application and the documents you send with it should demonstrate that you have enough cash flow to comfortably make payments.
Almost all lenders will require that you include cash flow statements and projections with your business loan application. Most accounting software will generate cash flow statements for you. A strong loan application will provide this information upfront so that lenders can calculate your debt service coverage ratio (DSCR).
- Debt Service Coverage Ratio (DSCR): Measures the relationship between your business income and debt and is used to determine how healthy your business’s cash flow is. It also plays a key role in knowing exactly what size monthly payment you can afford on a potential loan.
Before applying for a loan, I recommend calculating your DSCR so you can know exactly what you can afford. You don’t want to go into a spiral of unpayable debt or bankruptcy. Be sure that the borrowing amount you’re asking for and its monthly payments are realistic. A lender will shoot your application down if they aren’t convinced you can pay a loan back.
A loan application that displays weak cash flow or a poor DSCR is not likely to get approved. By calculating your DSCR and evaluating your cash flow ahead of time, you can be sure that you can afford the loan you want before submitting the application.
To learn more about DSCR, read our post Debt Service Coverage Ratio: How To Calculate And Improve Your Business’s DSCR.
Minimal Existing Debt
In addition to displaying strong cash flow, business owners seeking a loan should have little-to-no existing debt. A strong loan application is one that shows again and again “I can afford this loan.” If your business already has a large amount of existing debt, it’ll be hard to convince lenders to approve your application.
When lenders look at your application, they will check your existing debt using the DSCR mentioned earlier as well as the debt-to-income ratio (although, the DTI ratio is used more for sole proprietors and freelancers who aren’t considered separate legal entities and don’t have a DSCR).
- Debt-To-Income (DTI) Ratio: Measures the relationships between your personal debt and income and is used to determine how high-risk you are.
Working to get rid of existing debt also proves to lenders that you pay your debts in full and on time, which increases your credit score and betters your chances of getting approved for a loan. The less debt, the more cash you have available for a loan, and the stronger your application is.
Every lender requires certain documents to be included in a potential borrower’s loan application. Specific documents will vary from lender to lender, so be sure to check your lender’s requirements. Have all of the proper documents prepared beforehand.
Often, these documents include:
- Cash flow statements
- Bank statements
- Income sheet
- Statement of owner’s equity (or capital)
- Tax Returns
- Collateral documentation
- Legal documents and licenses
- Business history
- Business owner’s history
Some lenders may ask for these documents in the loan application itself, while many online lenders require you to submit an initial application and then provide the required documents at a later time. Having these documents ready to go whenever the lender asks for them demonstrates that you are timely and organized.
Taking every opportunity to impress lenders and put your best foot forward can make or break the chance of you getting that loan.
No matter how beautifully polished and impressive your loan application is, it’s not going to get you anywhere if you don’t meet the lender’s requirements.
Every lender has specific requirements borrowers must meet in order to qualify for a loan. They often include:
- A minimum credit score
- A specific amount of time in business
- A minimum monthly or yearly income
- Certain collateral
Be sure to carefully research potential lenders so that you can be certain you meet all of the borrower requirements. If you meet and exceed all of the requirements and have a beautifully polished loan application, you make yourself a strong applicant and increase your chances of being approved for the loan you want.
If you are having trouble finding a loan you qualify for, we can help you find the perfect loan for your business.
No Spelling Or Grammatical Errors
You’ve checked that you can afford a loan; you’ve met the borrower requirements; you’ve prepared all the proper documents. That should mean you’ve got the green light and are all clear, right?
Not quite. There’s one key final step.
Before sending off your loan application, double and triple check that there are no typos, spelling error, grammatical errors, or missing information. Maybe even get another set of eyes to read over it. This is an easy step to skip over, but I can’t stress how important it is.
Spelling errors and typos simply make you look unprofessional. Additionally, loan applications require a lot of legal information that you really don’t want to goof up on.
Once you’ve read and edited your finished loan application multiple times, you can be confident that you’ve done everything to make your loan application as strong as possible.
Now that you have a better idea of what lenders are looking for, you can more easily measure how strong your application is. After all, the stronger your application, the strong your chance of getting that loan.
Before you send off your application for good, be sure to ask yourself these questions regarding your loan application:
- Do I demonstrate a clear plan for the loan?
- Do I display the 5 Cs of Credit?
- Do I have enough cash flow for monthly payments?
- Did I eliminate most or all of my existing business debt?
- Are the required documents included (or at least prepared)?
- Do I meet or exceed the borrower requirements?
- Did I edit everything correctly?
If your application is strong, great! You can go ahead and send it off with confidence. If your application seems weak, you can save yourself the heartache and time and avoid being denied. Instead, take the time to strengthen your application and better your chances of getting approved.
For more information on how to improve your loan application, read our post 20 Tips To Improve Your Business Loan Application.