A small business loan can be an important source of capital to grow and operate a small business. Before you seek new credit, consider some strategies for boosting your loan approval chances. These actions may help you secure credit faster, with more favorable terms, and at lower interest rates.
Here’s a closer look at what lenders want to see, plus a dozen business loan approval strategies to help make your application more appealing in their eyes.
Key Points
• Lenders evaluate loan applications using the “five Cs”: Character, Capacity, Capital, Conditions, and Collateral.
• Enhance credit scores by paying bills on time and keeping credit utilization low.
• Maintain accurate financial records and strengthen cash flow through efficient management.
• Boost profitability by cutting expenses, negotiating better vendor prices, and improving operations.
• Prepare a comprehensive loan application with a solid business plan and detailed financial documents.
Understanding What Lenders Look For
To prepare yourself to apply for a small business loan, the first step is to get familiar with the factors that lenders look at closely. These include loan qualification criteria and “the five Cs.”
The Five Cs of Credit Assessment
The five Cs of credit assessment are a framework that many lenders use when considering small business loan approvals. The five Cs are:
• Character: This refers to your general creditworthiness. Lenders will look at how responsible you’ve been with debt in the past and how likely you are to repay it in the future.
• Capacity/Cash flow: Lenders want to be sure that you have sufficient income to be able to pay back your loan.
• Capital: If you’ve invested your own money in your business, you have more incentive to see the company succeed. Lenders like to see that you have some skin in the game.
• Conditions: The better your business is doing, the more likely you’ll have the resources to pay back your loans.
• Collateral: Lenders will likely look for collateral that can back the loan in case you fail to repay. For some types of loans, such as equipment financing, collateral is expected. Even if it’s optional, putting up collateral — such as real estate, inventory, or accounts receivable — can be a useful loan approval strategy.
Common Business Loan Qualification Criteria
In addition to the five Cs above, there are several other criteria that lenders will take a look at when approving you for a loan or business line of credit, including:
• Credit score: Lenders will look at your personal or business credit score to help determine your creditworthiness. Your score is based on your credit history, including factors such as on-time repayment and credit utilization.
• Revenue: Lenders may have minimum annual or monthly revenue requirements for borrowers.
• Years in business: The amount of time your doors have been open is a way that lenders can measure how successful your business has been. Small business loans may require that you’ve been in business for at least two years.
• Business loan proposal: Some lenders may ask you to provide a business loan proposal outlining how you plan to use the funds you borrow — and how you expect to repay the loan.
Addressing these criteria can help boost your loan approval odds.
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12 Strategies to Help Your Business Qualify for a Loan
With the above criteria in mind, several loan approval tips may improve your standing when it comes to securing a small business loan.
1. Strengthen Your Cash Flow Management
Lenders want to know that you have enough cash coming in to repay your loan. Strengthen your cash flow management by streamlining your invoicing, managing inventory efficiently, and implementing cash flow forecasting.
Forecast your cash flow by estimating how much money you think you’ll spend over the coming months, as well as your expected income.
Always send invoices on time and consider adding incentives for companies to pay early. Take stock of your inventory, especially items that don’t move quickly. Consider whether it makes sense to continue carrying them.
2. Improve Your Business Credit Score
Your business credit score is a numerical assessment of your creditworthiness. Within the Paydex scoring system, a score of 80 to 100 is considered strong. For FICO, anything above 700 is regarded as strong. You can improve your score by paying bills on time and maintaining a low credit utilization rate.
If your business is new and hasn’t established credit yet, lenders considering you for a startup business loan may want to look at your personal score. You can improve your personal score by paying bills on time and repaying outstanding debts.
3. Organize and Optimize Financial Records
Your financial records provide lenders with insights into how your business operates. Keep financial records up-to-date and accurate, including financial statements, bank statements, and tax returns. Maintain a balance sheet that helps you account for costs and keep track of assets, liabilities, and equity.
4. Reduce Your Debt-to-Income Ratio
Your debt-to-income (DTI) ratio compares your monthly debt payments with your gross monthly income, aka your pretax income. The higher your DTI, the more money you’re dedicating to debt repayment.
High DTIs may make lenders nervous. They may fear you are overextended and lack the resources to take on more debt. Lowering DTI by paying off existing debts can make you more appealing as a borrower.
5. Increase Business Profitability
Growth is one way to increase the profitability of your business; another is to trim unnecessary expenses. For example, consider cutting back on unnecessary travel, office supplies, entertainment, and food. Carefully evaluate your inventory and liquidate items that aren’t selling well. Consider ways you can cut back on utilities, such as smart thermostats or more energy-efficient lighting.
You may also be able to negotiate for better pricing with your vendors, who are often happy to work with customers to maintain loyalty.
6. Develop a Robust Business Plan
A business plan explains how your business will operate, who your target demographic is, how you plan to make money, and what sets you apart from the competition.
An effective business plan includes these common elements:
• Executive summary
• Company description
• Products and services
• Market analysis
• SWOT analysis (strengths, weaknesses, opportunities, and threats)
• Marketing and sales strategy
• Financial analysis
7. Build a Stronger Management Team
Lenders want to be sure that the funds they offer won’t be mismanaged. Build a strong management team with the skills and expertise needed to succeed in your field. When applying for a loan, consider augmenting your business plan with descriptions of your team members’ business experience.
8. Expand Your Business Collateral
Using valuable assets as collateral can help you qualify for a loan because collateral typically helps lenders reduce their risk. Traditional business assets might include real estate or equipment. To increase your eligibility, consider expanding your collateral options to include personal assets or personal guarantees.
9. Establish Banking Relationships Early
A longstanding relationship with a bank can help you secure credit when you need it. Begin building this relationship as early as you can, as you get your business off the ground. Doing so may pay off later, when you need to secure funding, friendly bankers may be able to pass along some loan approval tips.
10. Improve Operational Efficiency
Operational efficiency means optimizing how you use your resources—including time, money, and employees—to maximize your ability to produce goods and services while minimizing waste.
To improve operational efficiency, consider ways to streamline your workflows. For example, you might automate standard repetitive tasks such as invoicing or data entry.
11. Diversify Revenue Streams
Diversifying your revenue streams helps ensure that you are not reliant on just one source of income, which could leave you vulnerable to market fluctuations. Having diverse sources of revenue can also work to make cash flow more predictable.
Common ways to diversify include offering new goods or services or expanding into different markets. For instance, your business might offer items for sale online in addition to its brick-and-mortar location.
12. Prepare a Compelling Loan Application Package
Make it easy on yourself and your lenders by pulling together a comprehensive loan application package. That way, all the information your lenders will need will be in one place, and you’ll be prepared to answer any questions they may have. Before applying, you may want to ask your lender what their business loan requirements are.
Gathering Required Documentation
The documents you’ll need when applying for a business loan likely include:
• Business plan/loan proposal
• Business license and registration
• Legal documents, such as a commercial lease or contracts with vendors
• Financial documents, including financial statements, bank statements, income and cash flow, debts, and valuation of collateral.
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The Takeaway
A small business loan can be just the tool you need to take your business to the next level. To help ensure you are able to secure the credit you need, get prepared. This means organizing your financial and business documents and bolstering your credit wherever you can.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
What do lenders look for when approving a business loan?
When approving a business loan, lenders will consider your creditworthiness, your capacity to pay back a loan, whether you’ve invested personal capital, what condition your business is in, and whether you can back the loan with collateral.
How can I improve my chances of getting approved for a business loan?
Improve your chances of getting approved for a loan by boosting your credit score, keeping your debt-to-income ratio low, organizing your financial records, and presenting a strong business plan.
Does my personal credit score affect my business loan application?
If your business is new and has not built credit yet, your lender may consider your personal credit score instead.
How long should my business operate before applying for a loan?
Lenders typically require that you’ve been in business for two years before you apply for a business loan.
What financial documents are needed to apply for a business loan?
The financial documents you’ll need to apply for a business loan may include financial statements, bank statements, income and cash flow records, debt agreements, and valuation of collateral.
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