Did you know that around 29% of small businesses fail due to a lack of capital?
For small businesses, the availability of fresh sources of capital is commonly a critical element for their success as these companies often experience sudden spikes in demand or temporary downturns in sales that require liquidity injections to either protect or grow the business.
Small business loans are a convenient tool for companies to tackle these and other cash flow issues but most business owners believe that their chances of getting approved for one of these loans are fairly small, even if their companies are profitable.
Statistics emphasize this diminished reliance on loans, as only 43% of small businesses in the United States applied for a loan last year.
Although it is true that certain lenders often impose a high bar to grant small business loans, financial technology companies are changing that long-dated paradigm, and small business owners are increasingly relying on these providers with 3 out of 10 of these entrepreneurs now saying that they have turned to online lenders to fulfill their financial needs.
With all this in mind, the following article aims to provide a few golden rules that you should follow to increase your chances of getting approved for one of the small business loans offered by these innovative lenders.
Rules to increase the chances of getting your loan approved
Most lenders have a minimum criterion that the borrower must meet to be considered eligible.
In most cases, that criteria consist of a minimum credit score, a certain number of years in business, a minimum amount of annual revenue – along with the corresponding supporting documents like bank statements and tax filings.
That said, meeting that criteria don’t necessarily guarantee that you’ll get your loan approved as lenders could also look at things like the state of the industry in which the business is in or the amount of debt that the company currently owes.
With all that in mind, we can draft some golden rules to increase your chances of getting approved when applying for small business loans:
- Keep your personal credit score above the 600 level: this can be achieved by staying current on your payments while keeping your credit utilization ratio at a low level.
- Avoid being late on your payments at all cost: late payments have a dramatic impact on your credit score and should avoid them unless you have no other alternative.
- Avoid applying for multiple loans at once: hard credit inquiries stay on your report for months and they can diminish your credit score significantly.
- Provide all the documentation required by the lender as soon as possible: have your documents at hand so you can e-mail them once – or if – the lender requires them.
- Book every dollar you make as revenue so you can increase your financial appeal to prospective lenders: if you receive any payments in cash, you should deposit the money on your account so it can be reflected on your bank statement.
- Avoid excessive debt as that could reduce your chances of obtaining small business loans: too much debt is a warning signal for lenders while having no debt, or even unused available credit, could increase your chances of getting approved.
Rules to make the most out of your small business loans
Once you get approved for a loan, you must be wise about choosing how you spend the money since the cash flows coming from those investments should sustain the interest and principal payments you will be making in the following months.
These are some recommendations to use the proceeds from small business loans adequately:
- Draft a cash flow projection: forecast how your cash flow will behave during the lifetime of the loan so you can identify potential cash gaps to act quickly to avoid being late on your payments.
- Establish a clear destination for the funds: avoid using them for discretionary or non-productive expenses as both the interest charge and the principal will become an expense for the business.
- Keep an emergency fund: in case something doesn’t go as planned, you should have a go-to fund with enough funds to cover at least two monthly installments.
- Be careful when purchasing hard assets: investing small business loans in the purchase of hard assets must be carefully planned as the cash flows from those investments can often take longer to come in.
Rules to avoid being late on paying back your small business loans
Your creditworthiness is a valuable asset whose power you should not underestimate.
For this reason, being late on paying the installments of your small business loans should be completely off the table.
That said, here are a few tips that could help you meet those deadlines:
- Reminders & alerts: set reminders on your calendar three to five days before the installment is due.
- Establish a plan: this plan should outline how you will pay your installments and any other payment associated with your loan. This plan should describe where the money will come from and it is also advisable that you include a plan B in case your primary source of inflows does not perform as expected.
- Stay on top of your cash flow projections: by doing this you will be able to identify any deviations in your revenues or expenses on time so you can make the necessary adjustments to avoid being cash strapped when the loan is due.
Financial technology companies – also known as fintechs – have facilitated access to small business loans in the United States by dramatically reducing application and approval times. These companies are also offering much more flexible credit terms including longer credit periods and no pre-payment penalties.
Camino Financial is a lender in the US that has made it much easier to access credit thanks to online applications and more flexible requirements. Take a look at their new and simpler approval process.
You can take advantage of this fintech boom and the recommendations outlined above could help you in increasing the odds of getting approved for small business loans.
Additionally, you could follow these tips to administer the funds appropriately once you get approved, so you can make the most out of these convenient financing tools.