20 Tips To Improve Your Business Loan Application
The loan application process can seem overwhelming at times. But keep in mind that all lenders really want to know is that you can pay back the loan. Your application is the perfect place to prove that you can and will repay your loans successfully. Filling out a loan application is about being prepared and putting your best foot forward. It’s important to “sell” lenders by convincing them that your business is reliable, profitable, and going places. According to Entrepreneur, potential borrowers should:
Think of your loan application as a sales tool, just like your brochures or ads. When you put together the right combination of facts and figures, your application will sell your lender on the short- and long-term profit potential of lending money to your business.
Easier said than done, right?
We’ve put together a comprehensive list of the best tips, tricks, and practices for improving your business loan application. By knowing how to optimize your loan application, you can improve your chances of getting the loan you want. Here are 20 practical tips for nailing the loan application process and increasing your chances of securing a small business loan.
Table of Contents
- 1. Have A Plan
- 2. Choose A Realistic Borrowing Amount
- 3. Calculate Your Monthly Payments
- 4. Find The Right Type Of Loan
- 5. Find The Right Lender
- 6. Understand The Loan Process
- 7. Have A Strong Business Credit Score
- 8. Don’t Forget Your Personal Credit Score
- 9. Know What’s On Your Credit Report
- 10. Pay Off Existing Debt First
- 11. Increase Your DSCR
- 12. Offer Up Collateral
- 13. Prepare The Proper Documents
- 14. Create A Cash Flow Projection
- 15. Use Accounting Software
- 16. Create A Business Plan
- 17. Be Professional
- 18. Wait Until The Market Is Good
- 19. Don’t Ignore Social Media
- 20. Seek Extra Help
- Final Thoughts
1. Have A Plan
Lenders want you to demonstrate that you have a clear purpose and an actionable plan for your business loan. If you simply say you need $50,000 without giving a reason, most lenders will shoot you down right then and there. Instead, be as specific as possible about your plans for the loan. Explain that you need $50,000 to purchase a new piece of equipment that will double your production efficiency, for example.
Here are some common reasons that small businesses give when they apply for additional funding:
- Business expansion
- Purchasing inventory
- Updating equipment
- Hiring or training new employees
- Increasing cash flow
In short, when filling out your loan application, be sure to give a reason why you need the loan and discuss how the loan will benefit your business in detail.
2. Choose A Realistic Borrowing Amount
For your application to be successful, it’s vital to be realistic about how much cash your business needs. Don’t ask for too much, and don’t underestimate expenses or costs and ask for too little.
Don’t guess, in other words. Sit down and crunch the numbers. If you need a loan to purchase new equipment for your business, research exactly how much that equipment costs, including tax, shipping and handling, implementation, and/or any training required to use it.
Lenders want to work with realistic, responsible borrowers who know, to the cent, how much money they need to achieve their goals and grow their business.
3. Calculate Your Monthly Payments
A lender’s biggest question is always “can you pay back the loan?” If you can’t satisfactorily prove that you can repay the loan, you’re out of luck.
Lenders evaluate whether you can afford monthly loan repayments by using the debt service coverage ratio and the debt-to-income ratio. Both ratios are used to determine how risky your business is and if you can afford to pay back the loan or not.
- Debt Service Coverage Ratio (DSCR): Measures the relationship between your business’s income and debt. Since the DSCR measures how much excess cash your business has after meeting its financial obligations, the higher your DSCR, the better. A DSCR of 1.25 or higher indicates that you have enough cash flow to run your business, while still having money left over to take on new debt.
- Debt-To-Income Ratio (DTI): Measures the relationship between your personal income and debt as the business owner. Since the DTI indicates how much of your income is designated to debt, the lower the DTI, the better. A DTI ratio of 36% or lower is ideal as it shows that you can afford to comfortably take on loan repayments.
Note: Most lenders rely predominantly on the debt service coverage ratio to judge small business loan eligibility. However, sole proprietors and freelancers are not separate legal entities, so lenders will use your DTI to determine your creditworthiness.
These ratios provide a good indication that you can (or can’t) take on more debt. Before turning in your loan application, calculate your own DSCR and DTI scores. Making sure your DSCR and DTI ratios are ideal will increase your chances of impressing a lender. You can also use these ratios to find out exactly how much you can afford to repay each month, which can help you be realistic about your borrowing amount.
Read our posts Debt Service Coverage Ratio: How To Calculate And Improve Your Business’s DSCR and Debt-To-Income Ratio: How To Calculate And Lower Your DTI to learn more.
4. Find The Right Type Of Loan
All loans are not created equal. To improve your chances of securing a loan, make sure you’re applying for the right kind of funding for your business.
Here are the most common types of business loans:
- Installment Loan: An installment loan, or term loan, is issued in one lump sum and paid back in regular intervals or installments, plus interest.
- Short-Term Loan: A short-term loan is issued in a lump sum and paid back in regular intervals over a short period of time. Instead of earning interest, short-term loans have a fixed fee that is added to the repayment amount.
- Line of Credit: With a line of credit, a lender grants you a certain amount of money that you can draw from as needed.
- Merchant Cash Advance: While not technically a loan, a merchant cash advance is a type of financing in which businesses sell their future receivables for immediate cash.
- Invoice Factoring: While not technically a loan, invoice financing is the practice of selling unpaid invoices at a discount in return for immediate cash.
Carefully choose which small business lending method is right for you. Don’t waste your time filling out applications for loans that aren’t suited for your business. Improve your chances of getting approved by applying for the right type of loan.
To learn more about the pros and cons of each loan and to decide which is right for you, download our free Beginner’s Guide To Small Business Loans.
5. Find The Right Lender
Finding the right lender can make or break your chances of being approved for a business loan. Each lender offers different types of loans and has different borrower requirements. Some only lend to established businesses, while others lend to startups. Some only work with businesses that have good credit, while others care more about your annual income. You get the picture.
Carefully researching each lender and their requirements can help you know if you qualify for a loan before putting in all the effort of completing an application.
6. Understand The Loan Process
Lenders want to work with responsible, experienced borrowers. Increase their trust in you by having a good understanding of how loans work. Not only does this show that you know what you’re doing, it makes the application process go more smoothly. According to Forbes:
The more educated you are about small business lending options and procedures, the more likely you will be successful in obtaining a loan.
If you’re asking a lender what an interest rate is or to explain the difference between a term loan and a line of credit, it’s time to go back to the basics. But don’t worry, we’ve got you covered with our Beginner’s Guide To Small Business Loans.
7. Have A Strong Business Credit Score
Another key to a strong loan application is having a healthy credit score. Lenders use credit scores to determine that your business is trustworthy and able to pay its loans on time. Having strong credit will not only increase your chances of being approved for a loan, it can also qualify you for better loans with more favorable terms and rates.
Read our Ultimate Guide To Improving Your Business Credit Score to make your credit score — and loan application — even stronger.
8. Don’t Forget Your Personal Credit Score
Lenders don’t just look at your business credit score; they also look at your personal credit score when applying for a loan. Lenders want to establish your character as a borrower to see if you are trustworthy and pay your debts on time. This is especially true if you are required to sign a personal guarantee.
Improve your loan application by having great business and personal credit scores. Improving your personal credit may take some time, but will be more than worth it when applying for a loan. Read our post 5 Ways To Improve Your Personal Credit Score to master your credit score and wow potential lenders.
9. Know What’s On Your Credit Report
When applying for a loan, be sure to know your credit report forward and backward. Lenders will look at your credit report to evaluate your credit history before approving you for a loan. If you know there’s negative activity on your report, explain it to your lender in your application. This may not always make up for the poor credit report, but it might make lenders understand your situation better.
10. Pay Off Existing Debt First
We know you’re probably foaming at the bit to get business funding, but paying off existing debt before applying for a loan could be the key to securing a loan in some situations.
If you already have substantial debt, a lender is far less likely to approve your loan application for fear that you won’t be able to keep up with the repayments. Not only will paying off existing debt show lenders that you mean business and have a good credit history, it will also increase your debt service coverage ratio and lower your debt-in-income ratio, leaving you with more cash to use on a new loan.
11. Increase Your DSCR
Paying off your existing debt isn’t the only way to increase your debt service coverage ratio. If you want to increase your DSCR and show lenders that you have plenty of cash to afford a loan, here are some additional tips:
- Increase your net operating income
- Decrease your net operating expenses
- Decrease your borrowing amount
Finding ways to cut back on operating expenses and increase your sales income will boost your DSCR. In some cases, your DSCR may not need a boost. If your operating income and expenses are already optimized, or if you don’t have time to implement changes before applying for a loan, consider decreasing your desired borrowing amount. Maybe you can’t afford payments on the $100,000 loan you need to replace the entire company’s computer systems, but you can afford payments on a $50,000 loan to replace the equipment for your executives and sales team. Lenders will only approve loan applications for loans when they know that you can afford the payments.
12. Offer Up Collateral
Many lenders have specific collateral requirements. If you don’t have the assets to meet those requirements, you’re much less likely to have your loan application approved. Be sure to carefully research your lender’s borrower requirements to see exactly what collateral they require. Some may require specific assets, while others may simply require a blanket lien or personal guarantee. Be sure that your business can meet these requirements and feels comfortable in doing so.
Once you’ve decided on what collateral your business can offer up, prepare a document outlining each asset offered. Include this in your business loan application to show lenders that you take your business seriously and have something to lose if you default on the loan. Lenders aren’t evil monsters, lying in wait for you to default so they can steal your assets — they just need an assurance that they won’t lose all of their money if you can’t repay your loan. The hope is that you will be more likely to pay your loan back with your collateral at stake.
To learn more about collateral, check out these resources:
- Secured Vs. Unsecured Business Loans
- Should I Sign A Personal Guarantee?
- What Is A UCC Blanket Lien?
13. Prepare The Proper Documents
To complete your loan application, lenders require certain documents to verify your business’s financial history and validity. The documents required vary by lender, but here’s an idea of types of things they might ask for:
- Cash flow statements
- Bank statements
- Income sheet
- Profit & loss report
- Statement of owner’s equity
- Tax returns
- Collateral documentation
- Business licenses and registrations
- Articles of incorporation
- Commercial licenses
- Franchise agreements
- Business history and business owners’ history
- Owners’ resumes or background
Your lender may not require all of these, but having the above documents prepared before applying for your loan can help the application process proceed more quickly. Gathering these documents ahead of time can also help you have a better understanding of your business’s financial state — always good information to have before seeking business funding!
14. Create A Cash Flow Projection
Lenders don’t just analyze your business’s financial past; they also want to see that you have a promising future. One of the best ways to promote faith in your business’s future is to add a cash flow projection to your loan application.
A cash flow projection, or cash flow forecast, is an estimation of your business’s future operating income and expenses. The best way to create a cash flow projection is to realistically predict your future expenses and sales. Use your past cash flow statements as a jumping-off point so you aren’t just winging it.
To learn more about how creating a cash flow projection can benefit your business, read our article How To Calculate And Analyze Business Cash Flow.
15. Use Accounting Software
Before applying for a loan, you need to have a solid understanding of your business’s financial state and a firm grasp on managing cash flow. One of the best ways to achieve this is by using accounting software. Accounting software will track your income and expenses so you can know exactly how much you’re spending and how much is left to use on a loan.
In addition, accounting software can help you run the reports required by lenders, such as the income statement, profit and loss, and cash flow statements. If you need help finding the perfect accounting software for your business, check out our comprehensive accounting software reviews and compare our top favorite accounting software programs.
16. Create A Business Plan
While not always required by lenders, a business plan can earn you a gold star and shows a lender that you are organized, prepared, and responsible. A strong business plan also allows you to further demonstrate why you need a business loan and exactly how it will benefit your business.
Additionally, a business plan lets you present realistic repayment plans, which assures lenders that you have thought of a strategy for repaying your loan. Many business loan specialists recommend making a repayment plan as well as multiple backup plans, just in case.
17. Be Professional
This should go without saying, but here’s a friendly PSA: Being professional in all of your communications with a potential lender is incredibly important. Whether you’re interacting in person, over the phone, online, or through your loan application itself, be sure to put your best foot forward. This is the difference between being a C student and an A student, which in the business world equates to getting a loan or not getting a loan.
As we mentioned earlier, lenders care about character. Show a potential lender that you are professional, kind, and put together. Always spellcheck your work and ensure that every section of your application is filled out properly. Have all of the required documents ready for when your lender needs them.
And, don’t forget that honesty is one of the most important aspects of a strong character. It’s easy to fib to try and make your business’s situation sound better, but this will only hurt you in the end. Lenders aren’t stupid. They can tell if you’re lying and can easily see when the financial statements don’t add up. Don’t ruin your chance of getting approved for a loan. Instead, be honest and trust that your character and business expertise are enough.
18. Wait Until The Market Is Good
This may seem backward, but don’t wait until you are in dire need of money to try to get a line of credit. Apply for a line of credit when the economy is booming and your business is successful. This way, when you do need to draw on a line of credit, you’ll already have the funds available.
You are much more likely to be approved for a loan if your business is healthy and has excess cash flow — and you’re more likely to get favorable rates and better terms to boot.
19. Don’t Ignore Social Media
For many lenders, it isn’t all about the money. They also want to know that you and your business have a good reputation. For this reason, many lenders review your business’s social media platforms and sites like Yelp before approving your loan. If they like what they see — good customer service, positive reviews, an effort to respond to and correct poor reviews — they can trust that your business has good character. If they see any red flags, they may decline your application altogether.
Treat others like you want to be treated using your social media, and lenders may be that much more likely to “treat you” to a business loan.
20. Seek Extra Help
If you are still worried about your loan application or want a second opinion, you can always seek professional assistance. Organizations like SBDC and SCORE are designed specifically to offer small business advice; your local chapter may be able to assist you in bettering your loan application. You can also have an accountant view your loan application and financial documents. They can help make sure everything is in order and raise any potential red flags that lenders would be concerned about.
Note: Some lenders actually require you to have your loan application reviewed or audited by an accountant. Make sure you know your lender’s policy before submitting your loan application.
We’ve covered twenty practical steps you can take to improve your business’s loan application. Now, when you finally send in your application, you can rely on more than crossing your fingers. Don’t guess or trust to luck. By optimizing your loan application and knowing exactly what lenders are looking for, you significantly increase your chances of getting approved.
If you are still looking for the right lender, check out our top-rated lenders. Best of luck!