Top Loan Application Tips For Small Businesses In 2024
Applying for a business loan usually requires more than just financial reports. It typically requires choosing your loan type, repayment terms, interest rates, and a realistic loan period.
It may seem like an immense process to go through as a small business owner. With the right preparation, applying for a business loan can be simple and quick.
This article discusses business loan application tips to help you apply for a business loan easily.
Go Over The Fundamentals Of Business Loans
Whether they’re online lenders or private lenders, they generally have more faith in approving business loans for owners who understand all the requirements involved in a loan agreement.
The first of our business loan application tips is to research: interest rate, lender and loan options.
Make sure your business finances can handle repaying the loan. While applying for a business loan, it can be easy to lose track of important details. It’s crucial to continuously track your information through your credit file, which is discussed below.
Track Your Information Through Your Credit File
A credit file, or a credit report, is a breakdown of your credit history. This is typically among the major documents lenders use when deciding whether to approve a business loan.
It’s a record of your financial history like your business credit card expenses, your personal credit score, and loan history.
Any past financial issues may affect the likelihood of getting a small business loan. Keeping a good credit score is a top point in business loan application tips for this reason.
Maintain A Good Credit Score
Many factors can affect this score, from bill payment history to late payment fees and the amount of debt you have.
While most lenders may have different formulas for an acceptable score, maintaining a good standing gives you better chances and is a piece of common advice in business loan application tips.
Here are some ways you can keep this score up during the application process.
- Pay bills on time
- Stay within your credit limit
- Maintain your credit history with older credit cards
- Only apply for new credit when needed
- Check your credit report for errors
The next of our business loan application tips concerns the types of loans you can apply for.
Choose The Type Of Loan
Loan types generally differ depending on the loan amount, duration, use, and creditworthiness of the borrower.
Listed below are the most common types of loans.
- Term Loans: These are immediate finance sources. Lenders usually give you a lump sum of cash, and there is a repayment schedule to pay back the principal and interest.
- Short-Term Loan: Similar to term loans, but with a shorter repayment period, and are usually more expensive. There is a higher interest, but the money-back guarantee is typically faster.
- Business Line of Credit: This is a revolving credit line that lets you use ongoing capital. You only pay the interest relative to the amount you borrow. After repaying the borrowed funds, you can get access to the credit line again.
- Business Credit Card: Similar to a personal card, you can pay back what you spend at a later date.
- Merchant Cash Advance: This follows the practice of “Use tomorrow’s earnings for today’s cash.” The lender will typically give you cash that you repay using a percentage of your earnings.
- Accounts Receivable Financing: Also known as factoring, this loan type usually lets you trade outstanding invoices for cash. This can be helpful if you need extra funds to purchase equipment or pay service fees.
More General Loan Types
There are two additional loan types: secured loans and unsecured loans.
A secured loan uses collateral in case the borrower is unable to pay back the loan on time. In cases where the borrower is unable to repay the loan, the lender seizes the collateral.
However, collateral decreases the risk for the lenders, so you can typically borrow money with more leeway on the interest rate and borrowing limits. You may also have a longer repayment period.
Unsecured business loans don’t need collateral and are based on income and creditworthiness. Since it’s very accessible with good credit, it is often riskier for borrowers and lenders. It usually has stricter borrowing limits, requirements, and higher rates.
Lenders tend to want assurance that you can pay them back. Another of our business loan application tips is securing trust with your lender.
Sticking to a fixed amount may stop you from borrowing more than you can afford.
Determine The Necessary Amount
Business finance is tricky, even with a steady income. An unexpected expense can stop you from reaching your business goals.
Choose loans carefully and avoid loans that have early repayment penalties. Ask for a loan that fits with your projected income to avoid debts, guaranteeing the lender that repayment is possible.
Stick To What You Can Repay
When applying for a business loan, don’t borrow beyond your means. Only borrow what you can afford to repay within the repayment period.
By sticking to a realistic loan amount and staying organised, you can potentially grow your business and repay the loan on time.
Need help to calculate a realistic loan amount to apply for? Use our handy business loan calculator for an initial estimate.
Settle Your Paperwork Ahead Of Time
For the next of our business loan application tips, get the required documents and financial statements before applying.
This is typically the make-or-break part of applying for a business loan. Your business’s financial situation automatically tells lenders if you can afford a business loan.
The common things to add to your financial statements include the following.
- Business credit score
- Tax returns
- Credit history
- Business income forecast
- Proof of cash flow
- Bank statements
- Valid IDs
Among the listed documents, one of the most important ones is your proof of cash flow.
Supply Proof Of Cash Flow
Lenders check your income before approving a loan. They need a guarantee that they won’t lose money after you apply for a business loan.
Using your older financial records, you can create a projection to prove that you will be able to repay your loan on time.
Other than giving it as a document, you can prepare a business plan.
Create A Business Plan And Timeline
Note down every detail of where the loan will be spent. Show your financial strategy using the loan and how your business intends to use the loan.
This can help both you and the lender forecast the success of the loan.
Conclusion
Applying for a business loan can help your business reach its goals strategically, if done in a sustainable way.
Keep these business loan application tips in mind, research thoroughly, prepare your documents, and only request enough to help your business thrive.
If you need that extra cash boost, applying for a business loan might be what you need.
