October 10, 2022 | Last Updated on: January 31, 2023
The simple truth: How hard it is to get a business loan depends on how lenders judge your ability to repay the money you receive from them. Inflation, challenging financial conditions, rising interest rates, and economic uncertainty have made it more difficult for business owners to pay back financing.
And while you can’t control macroeconomic conditions, you are able to rise above certain factors that go into loan approvals. This article explains what they are and what you can do to gain control over them, so you increase your chance of getting approved for a small business loan, even during these challenging times.
Lenders make small business owners prove that they manage money well and have the revenue required to pay back a small business loan. It’s critical to have an adequate cash flow to make monthly loan payments.
Prospective lenders will ask you to submit banking and accounting statements when you apply for term loans and other types of financing. They’ll do a cash flow analysis to see if you have enough cash at the end of the month to pay back the money they provide to you — or could have it based on how you plan to use the loan dollars.
Before applying for small business financing, go over your business financials with an eye on how lenders view them. Ensure that you have enough money to pay back a loan and still earn a profit. If your small business finances don’t look completely clean (something that’s becoming more common because inflation is leaving many companies strapped for cash), take steps to get them into better shape before applying for financing.
Most traditional banks and lenders require that borrowers be in business for at least two or three years before they approve them for financing. Startups and other new businesses have a hard time qualifying for traditional loans. Established businesses find it much more manageable. Some online and alternative lenders have less stringent requirements.
Simply staying in business demonstrates to lenders that you have a history of consistent sales, decent cash flow, solid profits, good management, and a satisfying consumer experience. The longer your business track record, the more likely it will remain in business so you can make monthly payments on the loan. And the more likely you will be approved for financing with competitive rates and terms that could help your business move forward into a better future.
This is an area where business owners have a LOT of control. Small business lenders consider the owner’s and the business’s credit scores by reviewing credit reports as part of the loan approval process to determine creditworthiness.
Most experts say it takes a minimum personal credit score of 700 and a business credit score of 155 to get approved for financing with a reasonable interest rate and loan term. This is particularly important in 2022’s rapidly increasing interest rate environment.
If you have bad credit scores, take steps to improve them before applying for a business loan. Make it a point to pay bills on time, increase your savings, limit your use of credit to reasonable levels, and maintain healthy cash flow. Doing these things consistently will ensure that your personal and business credit scores will improve over time, making it more likely you’ll be approved for financing.
Collateral is something of value owned personally by the small business owner (personal guarantee) or the company (business guarantee). It can be anything including a vehicle, property, jewelry, or investments. Your lender can seize your collateral and sell it if you fail to make payments on your business loan. Always make certain you have assets you can put up for collateral before applying for a business loan. Consider whether it’s something your business — or you personally — could afford to lose if you default on your loan.
Lenders want to know how entrepreneurs plan to use the funds loaned to them. Will you leverage them to grow your business or improve its condition? The only way you can prove this is by submitting a complete business plan when you apply for a loan. Most banks and traditional lenders will require this.
Your business plan should include a complete overview of your business, an explanation of how you plan to use the loan money, historic bank records, and tax returns, and financial projections that demonstrate the positive impact the financing will have on your organization.
If you’re unsure how to write a business plan, templates are available online through entrepreneurship organizations and the Small Business Administration (SBA). It’s a smart idea to use an SBA template if you plan to apply for a loan backed by a government agency.
During uncertain times like today, your business plan is a powerful tool you can use to qualify for a small business loan.
If flush times when most businesses have solid cash flow, it’s easier to qualify for larger loan amounts. In 2022, with inflation rates on the rise and interest rates increasing, you have to be realistic about the amount of financing you request. All lenders scrutinize loan applications to ensure funds will be paid back.
Unless you and your business have excellent credit scores, you’ve been in business a long time, can demonstrate a solid operating record, and have good cash flow and solid annual revenue, you may qualify for less financing than you expect. If you’re considering applying for a small business loan this year, be realistic about how much you could be approved for. If it’s not what you need to get through a rough patch or take your business to the next level, it might make sense to wait to apply in 2023 or beyond when things return to a more economic normal. Getting too little funding could result in you being strapped for cash, putting your operation’s future at risk.
A lender — even in challenging times like 2022 — is more likely to approve people they’ve successfully loaned money to before than ones they haven’t. While it’s always important to explore your options, it’s a good possibility you’ll get the best deal from a bank or other lender you’ve done business with before.
Another area that you have significant control over when it comes to being approved for a business loan in 2022 is the actual application process itself. Getting it right increases your likelihood of being approved. Submitting a sloppy or incomplete application puts your chances at risk.
Start by reviewing your company’s finances and decide how much funding you need, when you need it, and the purpose of the loan. Ask yourself these questions:
Once you understand why you need a loan, when you require cash, and how much money you need and can afford to pay back, the next step is to select the correct type of loan and provider.
Selecting the correct type of financing will improve your chances of getting approved. Here are some standard business loan options.
Different lenders specialize in various types of loans and use their own criteria to approve them. You owe it to yourself to shop around to find the right provider to meet your needs.
During the underwriting process, your lender will likely request certain documents, such as a business plan, personal and business income tax returns, bank statements, financial statements, and your business balance sheet. Having these things handy will make the loan application process faster and smoother.
If you apply for a loan through a bank, credit union, or SBA-approved lender, the process will likely be a cumbersome one that could take weeks or months. However, you will probably be rewarded with relatively favorable interest rates and loan terms. The loan application and approval process is less diligent with many alternative and online lenders. You could get same-day approval and have the money deposited into your business bank account the next business day. However, you’ll pay for the speed and ease of getting cash.
When you receive offers, review them to choose the best one. Here’s what to consider:
Always ask questions if any part of a loan offer isn’t 100 percent clear to you. Another option is to check out the Frequently Asked Questions (FAQs) section of a lender’s website.
If you’ve managed your personal and business finances carefully and done your due diligence, you should be able to secure the funding you need for your small business. When you do, use the funding as intended to take your operation to the next level.
