13 Simple Tips to Increase Your Chances of Getting a Business Loan
Securing a business loan can be a daunting task, so we asked 13 experts from various industries to share their best advice on how to increase your chances. From providing thorough information to knowing lender requirements, these CEOs, marketing managers, and financial strategists offer valuable insights to help you navigate the loan application process.
- Provide Thorough Information
- Build Relationships With Lenders
- Craft an Effective Elevator Pitch
- Demonstrate Business Growth
- Offer Collateral to the Lender
- Apply for Credit in Good Times
- Leverage Intellectual Property
- Address Risks in Loan Application
- Improve Your Credit Score
- Manage Debt-to-Income Ratio
- Minimize Your Negative Balance Days
- Choose the Right Lender
- Know Lender Requirements
Provide Thorough Information
The golden rule of taking any form of loan is that the more information you give to the lender, the greater the chances you’ll get the money you need. Show the lender, be it a bank clerk or a business executive, that you know exactly how much you need, how you’ll use that money, as well as how and when you’ll repay the loan. They will no doubt appreciate your thoroughness, and once they see the entire picture, you’ll no doubt be far more agreeable.
Build Relationships With Lenders
Getting a business loan is an important step for many entrepreneurs to get their operations off the ground. One tip to increase your chances of getting a business loan is to build relationships with potential lending institutions in advance.
The more comfortable the lender feels working with you, the higher your likelihood of obtaining a loan. An example of this would be to join professional organizations that represent lenders, such as trade and industry associations or non-profit credit counseling services—by doing so, you can show lenders that you are invested in understanding how finance works and are committed to being financially responsible.
Craft an Effective Elevator Pitch
It can be extremely difficult to secure a business loan, especially when a lender demands very specific requirements. One effective tip to increase your chances of getting the funds you need is to create an elevator pitch.
This strategy involves crafting a brief but informative description of yourself and your business in order to capture attention and clearly explain what you are asking for. This kind of presentation must be concise, convincing, and tailored to the individual lending agency so that they gain a greater understanding of why they should invest in you and your project.
Taking some time before meeting with them will give lenders real insight into who you are and boost the potential for approval.
Demonstrate Business Growth
The chances of obtaining a business loan are in tandem with the growth the business has been registering lately. After all, investors and banks find it easier to loan their money to brands that have accomplished an upward trend and promise the same pattern in the future too.
So when you know you’ll need a business loan in a few months, it is best to begin preparing now so your business can start raking in more revenue and profits. This growth pattern not only justifies the need for the loan but also instills confidence in banks to bet on your brand.
Offer Collateral to the Lender
Presenting your lender with collateral will increase your chances of getting approved for a business loan. Collateral is any asset or property you pledge to a lender as security for a loan. If you, as a borrower, default on the loan, your lender can seize any collateral to make up for their losses.
Collateral can be real estate, equipment, accounts receivable, and inventory, just to name a few. It’s important that the collateral you offer is of equal or greater value than the amount of the loan, so it makes sense for the lender to agree to it. Having collateral can increase your chance of getting a business loan and may even result in being able to negotiate better terms.
Apply for Credit in Good Times
Don’t wait until you desperately need money to apply for a line of credit. Apply when the economy is thriving and your business is booming. This way, you’ll already have the funds available when you need to draw on a line of credit. You are significantly more likely to be approved for a loan if your business is healthy and has excess cash flow, as well as get better terms and favorable rates.
Leverage Intellectual Property
One tip to increase your chances of getting a business loan is to have collateral. This can serve as a fallback should the loan go into default. An uncommon example might leverage intellectual property instead of physical assets; this could involve trademarks, patents, copyrights, and other non-physical items that offer tangible value.
Signing these rights over to a lender can help secure financing since the lender has legal recourse if payments are not made. The key takeaway is that having an assurance for the lender will improve their willingness to provide funds for your project or venture.
Address Risks in Loan Application
It seems counterintuitive, but business bankers are going to prefer to loan to businesses that have properly articulated the risks of their strategy in the plan presented to the loan officer. Articulate how different risks do not result in default. This gives the lender an idea that you have thought about alternative strategies to pay back the loan.
Improve Your Credit Score
Lenders can tell you are financially responsible and can make payments on time if you have a high credit score. The conditions of the loan and your ability to get financing may significantly change.
We attempted to raise our credit score before we needed money to grow our company. We eliminated our debts, repaid our loans on schedule, and kept our credit utilization low. This enabled us to get financing at a lower interest rate, which ultimately resulted in substantial cost savings for us.
Manage Debt-to-Income Ratio
Lenders use the debt-to-income ratio (DTI) as a crucial factor to evaluate a borrower’s creditworthiness when reviewing a loan application. This ratio is calculated by dividing the borrower’s total monthly debt obligations by their monthly gross income.
A high DTI implies the borrower has a significant debt burden compared to their income, increasing the risk of loan defaults. Similarly, when businesses apply for loans, lenders also consider the DTI to assess if they can handle additional debt payments.
A high DTI increases the risk for lenders to provide more funds to the business, showing potential financial challenges for the company to make timely loan repayments. Therefore, businesses need to maintain a low DTI by reducing their debt and increasing their income to improve their chances of securing a loan.
A low DTI shows good financial management practices, showing that the business can handle additional debt and secure loans with better terms and conditions.
Minimize Your Negative Balance Days
Reducing negative balance days as much as possible is one best practice. Proof of consistent cash flow is critical when seeking approval for a business loan. Inconsistency equals risk, and lenders will turn tail the moment they see over 3-5 negative days per month. Some alternative lenders may be more forgiving than that.
Choose the Right Lender
When looking for a business loan, it is important to choose the right lender. Researching different lenders and comparing their terms and conditions is the best way to increase your chances of getting a loan.
Consider the interest rate, repayment terms, and any additional fees or charges that could come with the loan. Read the fine print and ask questions to ensure you understand all the details. Ensure that your lender has experience in business loans and specializes in them.
They can offer more competitive rates and better terms. Having a good credit score and a solid business plan is also important when applying for a loan. Last, shopping around and comparing different lenders is important to get the best deal. Doing your research and taking the time to find the best lender can help you secure the loan you need.
Know Lender Requirements
Most lenders may work on the same lines, but for the specifics, they may have different requirements and expectations from their loan applicants. Whether it’s sharing your business plan or audited financial statements, you’ll be better prepared when you already know what a lender will ask from you.
For example, learning about the eligibility criteria will save you the trouble of applying to a lender that does not appreciate your industry or niche. And knowing more about the rate of interest will help you decide if you would even want a loan from specific lenders.
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