How To Properly Prepare for a Business Loan Application
Learning that you’ve been approved for a business loan can be a very exciting occasion for your business.
It may mean growth is on the horizon; that the big plans you’ve been dreaming up for ages are at last coming to fruition.
While the small business loan application process will hardly ever be completely stress free, there are a few things you can do now to better your possibilities of getting approved for the funding your business requires.
Here are five ways you can prep your small business loan application to set yourself up for success.
1. Analyze Your Personal Credit
As you’ve probably heard by now, your credit score is one of the main criteria that creditors look at when deciding to approve or deny you for a loan. It’s better to be proactive than reactive and so we suggest pulling your credit report (do a light pull) before submitting your loan application to check your approximate score. There are three main credit reporting agencies that lenders use, Experian, Equifax, and TransUnion. They all have slightly different reporting systems, so your results may differ with each one, however pulling your report from one agency should suffice.
Check your credit report for any disputable errors. These may include judgements or collections you never knew about, or that are just plain incorrect. If you do find any errors, contact the reporting agency in writing to get it resolved. This process can be tedious, but it can greatly improve your credit score.
If your credit score is accurate, but it’s still not as high as you would like, there are other ways to improve your credit score, including paying down your balances and always paying your bills on time, now and going forward.
For online lenders, your credit score should be no lower than 550, but the higher, the better– as it will affect both your chances of approval and your interest rates. If your credit score is low, it may be worth delaying your application while you take steps to improve it.
2. Improve Your Cash Flow
Lenders pay close attention to your company’s cash flow when looking over your loan application. Owning a small business can be costly; you can have business expenses like rent, inventory, payroll; and the list goes on. Lenders want to know how these costs will affect your ability to pay back your loan on time.
Since lenders are usually the last priority on that list, they want to make sure your cash flow margins are wide enough to cover their loan costs. If, after all your monthly expenses are paid, you don’t have much cash left over– your chances of getting approved for a loan won’t be great.
Big expenses will inevitably come up unexpectedly, so lenders want to see that you’ll be able to consistently make your loan payments even if you get stuck with a leaky roof. If you would like to increase your chances of getting your loan application approved, increase your cash flow!
To increase your cash flow quickly, focus on collecting receivables faster. You can achieve this by sending invoices electronically, offering online payment options for customers, or even offering a discount to customers who pay early. If all else fails, you can also improve cash flow by slowing down payables so your cash isn’t going out the door quite so fast. (But if you take this latter approach, don’t take it too far. Getting in a delinquent payment situation will only hurt your credit!).
3. Evaluate Your Debt Service Coverage Ratio.
The best way to determine how much loan you can afford where you stand in terms of cash flow before handing in your application is by calculating your debt service coverage ratio (DSCR). This ratio tells you and your lenders how much cash you have remaining after all your monthly expenses are taken out, and will give you a better idea whether you can meet the extra cost of a loan.
Your DSCR can be calculated on either a monthly or annual basis using this simple formula:.
Cash Flow/ Loan Payment = DSCR.
All lenders will require that you have a DSCR of at least 1. However, most lenders will require that you have a DSCR of at least 1.5 or greater.
4. Offer Collateral.
In order for lenders to safeguard themselves from loan defaults, they often require that you put up some form of collateral.
Sometimes this collateral can come from your business– such as company inventory, cash savings, equipment, or deposits. If lenders find your business assets to be inadequate, you may be asked to put up personal assets– such as your car or your family home.
If you don’t have collateral to offer, it doesn’t necessarily mean that you will be ineligible for a loan, but lenders may require that you have a cosigner who can offer some of their assets as leverage instead.
Now is a good time to make yourself aware of the particular risks associated with your potential loan. Even though you don’t plan on defaulting on payments, expected events do happen.
5. Know Your Options.
Remember, as much as you want to appeal to your lenders, you want to make sure any loan you take on is a good fit for your business. Pay attention to the options and rates available to you to make sure you’re getting the best loan for both you and your business.
Knowing what loans you ‘d like to apply for will help you further tailor your application to meet that lender’s specific requirements. With the right loan product paired with your stellar application, you’ll be approved in no time! You can apply for a business loan today with G-Force Funding here: https://gforcefund.com/apply/
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