New businesses present risks to financial institutions that well-established businesses do not. As a result, getting a business loan can be difficult. Lenders cannot verify profits or other details with a start-up like they can with a household-name service provider or distributor. Because lenders are unsure if the small business will flourish enough to repay the loan, the application process can be turbulent.
Use the following steps to improve trust and boost creditworthiness with lenders as a new business start-up. You’ll better the odds of loan approval by taking the precautions below.
Prepare before you apply
Lenders look at new businesses’ profits and personal finances when deciding for or against approval and calculating the loan amount. Since a new business often lacks profits and loss statements, now is the time to improve personal finances and establish creditworthiness.
Pay off outstanding debts first. Credit cards carry the highest interest and damage credit more than other loan types. Work on improving your credit score, which will be easier to achieve when you pay off the debts mentioned above. Establishing an accounting record will also work in your business’s favor.
Remember, lenders can look at the accounting record for a better idea of your finances and to assess your ability to repay the loan. When you prepare for the loan ahead of time, you’ll significantly improve the odds of approval. You’ll want lenders to feel confident that your business is worthy of the loan and that your finances will allow you to repay the loan with interest, as agreed upon in the loan terms.
Evaluate your risk
Lenders know that lending money to a small business is riskier than loaning to a large corporation. Lenders use specialized software like LoanPro to help evaluate each applicant’s risk, which is why small businesses often have trouble earning approval. Some factors that lenders account for in determining your risk include:
- No credit/poor credit
- Little to no collateral
- You’re status as a start-up
- Unorganized records
- Low-profit margins
You can improve the above areas before applying for a loan to increase your chances of approval. If you’re unable to improve your credit or organize your records, don’t be discouraged. This information gives you negotiating power in areas that you cannot improve or control, such as business profits or your standing as a start-up.
Once you sign a loan agreement, you are indebted to the financial institution. You don’t want to fall behind on payment or default on a loan, as failure to pay your monthly payments can destroy your business’s credit before things get off the ground. Every business needs to set aside a cash reserve for loan payments. This reserve helps you stay on top of the payments from the get-go.
Some lenders may require collateral for loan approval. The definition of acceptable collateral varies from lender to lender, but always necessitates items of value that you will lose when you renege on the loan.
Apply for the right type of loan
Learn more about the business loan options before you apply for a loan. Several types of loans help give new businesses the funds needed to open their doors. The more you learn about each loan type, the better your chances of finding the best loan for your needs. The best loan for your business depends on your unique criteria. Common types of business loans include:
- Business Line-of-Credit: Especially beneficial for new businesses, as you can establish a line-of-credit with a particular vendor.
- SBA Loans: Flexible-term loans endorsed by the Small Business Administration
- Term Loans: Loans repaid with interest in one lump sum in a set period
- Short-Term Loans: Small-value loans repaid in small payments over a short period
- Long-Term Loans: Large-value loans repaid in payments over a specific time
- Alternative Financing: Cash advances, crowdfunding, peer-to-peer lending, and other alternative sources of financing help many new businesses need to launch their product or service.
Establish business relationships
Because it’s difficult for most small businesses to get a startup loan without proof of profits, it’s vital to establish relationships with other small and large businesses. Forming these connections can increase your chances of business loan approval.
You can also look to your bank for support. They can recommend accounts and credit cards that better establish your worthiness with financial lenders. Consider using one or more bank resources to better your odds of approval.