A new startup, a new grocery store or an established eatery looking to expand further – all are small businesses. Such companies often need capital for their new or expanding business and have specific loan requirements. A brick and mortar business may need money to expand into ecommerce, an established shop may want to open two more stores in a new locality, or a vegetarian restaurant may want to expand into the paleo diet segment and needs money for more retail space. (For more, see: Starting A Small Business: Introduction.)
Owing to the wide variety of small businesses and their specific needs, small business loan applications are scrutinized carefully on a case-by-case basis by the potential lenders. We look at a few important points that can help improve the chances of securing a small business loan.
What Do Lenders Look For?
Simply put, the lender looks for certainty that the borrower will repay his small business loan in the allotted timeframe. This certainty can be indicated by potential business profitability, liquidity of business capital, minimal debt amount, healthy turnover rate of inventory and a healthy customer base. Anything that assures the lender of the above will enhance the loan approval. Anything that raises question about these factors may lead to rejection.
Improve Your Chances
- Understand the Small Business Loan Process: Each country/region has its own set of established financial regulations that govern financial markets, lenders and the associated loan processes. Being aware of the details allows you to present your loan application and the supporting documents in a better and favorable manner. Familiarity with the loan approval process, key points of consideration and the key documents (and the required details therein) will give you a clear head start.
- Prepare, Prepare and Prepare: From putting the loan application documents in order to speaking to the concerned lending officer in a confident tone while explaining your company's business potential, everything involved in the process matters. Sure, the bank will conduct its background due diligence by verifying the past accounts of the business and the borrower’s credit rating. But the better and better-presented information accompanying the loan application, the smoother ride the application process will be.
- Future Potential of Business: You may have a great innovative thought for your new business or you have great profit numbers form your previous venture. But the lender is looking beyond these past and present details toward future profitability, which can assure him of your ability to pay back the loan. The better those details are explained with the loan application, the easier it will be. Successful loan seekers even present a year-by-year projection of realistic numbers for revenue and profit, which assists the lender in assessing and approving the loan application.
- Backup Planning: It helps to keep at least two repayment plans ready. Often, the loan officer may find a few points to contest in the original business plan. It may lead to questions about the viability of your business and your loan repayment capabilities. Having a second business plan handy not only allows the loan application to sail through more smoothly, but also assures the lender about your business acumen and expertise. The secondary plan may include a different loan repayment schedule, or offer partial/enhanced collateral, which may not have been the part of original application.
- Hunt For Specialized Lenders: Multiple lenders exist for different industry sectors. For example, in a bid to promote agro-business, the government may sponsor a lender who offers cheaper loans to small-scale farming businesses. Similarly, small businesses in a particular industry sector may be eligible for speedy loans. Moreover, your education qualifications and work experience may qualify you for discounted rates and timely approval. A borrower should explore all possible options to not only benefit monetarily with lower interest rates, but also to enhance your chances of loan approval.
- Approach Multiple Vendors and Negotiate: Lenders make money by lending money. Just as borrowers look for easy loans, lenders too look for good and worthy borrowers. One should explore different loan options at multiple lenders and select the best deal at the lowest cost. Lending is a competitive business. If you are certain about your credit worthiness and repayment capability, it is even worth negotiating for a lower rate of interest.
The Bottom Line
No matter its size, a business may have capital requirements during different business stages (startup, growth or decline). Small business owners often end up struggling with loan applications due to their limited knowledge about processes and details. Keeping the above guidelines in mind and giving suitable time and thought to a loan application can not only speed up your capital availability, but might also get you a lower-cost loan. (For more, see: Start Your Own Small Business.)