Whether you need short-term or long-term business loans, approval is not a cinch. They are not processed the way personal loans are. While a fast business loan approval is the prominent feature lenders advertise to grab the attention of borrowers, business loans take at least three days to complete the process. The most common aspects that serve as the basis for approval are your business revenues, cash flow, and credit score.
Ways to improve your chances of getting a business loan approved
Here are the ways to increase your chances of being accepted for a business loan:
- Ameliorate your credit score
Credit history plays a paramount role in the loan approval process. Lenders look at both personal and business credit reports.
A business credit report will let them know about your payment records to suppliers and the responsible use of credit lines. Whether or not your business has a separate legal entity, your personal credit report will also be examined. You should always aim for a good credit score.
Here are some tips for improving your business credit score.
- Create a solid business plan
A business plan is a must, especially if your trading history is short. With the help of a business plan, you can demonstrate your vision, strategy, profit projections and growth potential. Submit a well-crafted business plan.
Make sure it addresses all questions that lenders generally target to decide on approval, such as your knowledge about the industry to survive the competition and create a customer base and to mitigate risks with contingency plans. An effective business plan is one that is a roadmap to profitability.
- Demonstrate strong cash flow
No matter how consistent you have been generating profits in the past, profitability cannot offset cash flow problems. In order to secure a business loan, you will need to ensure that your business does not struggle with cash flow problems. A good flow of cash ensures that you will not struggle to make payments and other recurring business overheads. Prove how business finance for small businesseswill improve cash flow.
- Have an alternative repayment plan
There are various types of business loans, and each of them works differently. It is crucial to understand the basic requirements to be met to get approval. Some business loans require collateral while others require a personal guarantee. In addition, you should carefully examine the total cost of your business loan.
The business world is unpredictable. An unexpected fall in demand or an economic crisis can hamper your profitability. This would make it quite complex for you to keep up with payments. You must have an alternative repayment plan. No lender will approve your application if you have no contingent repayment plan.
- Compare loans
Every lender has a different way to assess the risk involved in lending you money, which serves as the basis for deciding interest rates, APRs, and repayment terms. You should carefully compare business loans in the UK to choose the most affordable deal. Use online business calculators to know the estimated cost. You can learn a how business loans calculator works here.
- Keep your debt-to-income ratio low
While it is essential to keep your business and personal credit score perfect, you should also focus on maintaining a debt-to-income ratio. This suggests the amount of debt against your business revenues.
If you owe too much debt, lenders will be sceptical about your cash flow. Even though you have been managing all debts responsibly, you should try to keep this ratio as low as possible.
- Apply for the right type of loan you need
Sometimes, your business loan application is turned down because you fail to choose the right type of loan products. For instance:
- If you are a start-up, you will need a start-up business loan.
- If you need money to fund the temporary gap in cash flow because of unpaid invoices, you will need invoice financing.
- Similarly, if you have a high volume of debit and credit card sales, an ideal financing will be merchant cash advance.
- A business line of credit is a better option than term loans for businesses that have seasonal demands and fluctuating cash flow.
It is important to identify the purpose of borrowing money and what kind of loan is suitable for it. Consult a business loan broker in the UK to know what kind of loan option will be suitable for you.
The bottom line
To ameliorate your chances of business loan approval, you should ensure that your personal and business credit scores are excellent. Create a solid business plan, so lenders know your vision and growth potential. Demonstrate strong cash flow and choose the right loan product.
FAQs
- What documents will you need to apply for a business loan?
You will need to submit:
- Bank statement
- Collateral documents
- Tax returns
- Financial statements
- Legal documents if necessary
- What if my business credit rating is poor?
A poor credit rating will not preclude you from submitting your application, but this might not let you avail yourself of the most favourable deals.
- What are the common causes of business loan rejection?
The common causes include but are not limited to:
- Incomplete documentation
- A poor credit score
- A lack of transparency
- A high debt-to-income ratio
- An unrealistic business plan
- What are my options if my loan application is turned down?
You should request the reason for the rejection. However, lenders are not obligated to entertain your request. Figure out on your own what could have gone wrong. Maybe you need to improve your credit score and cash flow, or maybe you need to strengthen your overall profile. Business brokers like The Business Funds can help you find out the reason and fix it.
- What is a personal guarantee?
Whether you apply for a secured or an unsecured business loan, your lender might ask you to give a personal guarantee. It means you will be responsible to discharge the debt in case your business fails.
Harry Kane is a financial writer and author who has covered wide topics related to business loans and finance for the last decade. He has been working as the Chief Contributor in finding out deals on various business finance products covered by Thebusinessfunds, a reputed business loan broker firm in the UK. The primary work of Harry is to analyse the loan requirements of various businesses according to their circumstances and affordability. He directly communicates with the loan aspirants and guides them to get the right loan matching their needs. He has a vast experience in finance writing, working with many major business firms in the UK. At Thebusinessfunds, Harry also used to write well-researched blogs covering the financial problems of business loan aspirants and providing relevant solutions. He is a postgraduate with MSc. in Banking and Finance.
