Lack of assets is one of the primary reasons behind the failure of many businesses, especially start-ups. The majority of entrepreneurs think of loans as a means of obtaining finance for the development or expansion of their business.
But getting the approval for a loan is a job easier said than done. Banks or other lenders take numerous factors into consideration before deciding whether or not to grant a loan to an applicant.
Know What Lenders Look For:
Lenders give a lot of deliberation to what we can call the 4 C’s mentioned below while considering any loan application:
1: Condition
You will not get a loan from a bank lender if the financial conditions of your business are not up to standard. So, consider your credit score, and try to keep your finances afloat. Ultimately, a bank wouldn’t want to lend to you if they don’t think you can pay them back.
2: Capacity
In order to get a loan, you need to prepare bank statements that show your business’ current income, along with an income projection for the next three years.
Similar to the first point, this is about fostering a trustful and strong relationship with your lender. Not only would they want reassurance you can pay your loan back, but they would want to see evidence that your financial status is considerably steady.
Of course, the alternative is purposefully bumping up your credit score, for example, for the sole purpose of obtaining a loan. Therefore, some long-term evidence that you are reliable financially is an unspoken necessity.
3: Collateral
A bank or a lender who is offering you a secured loan will ask you for collateral in case you fail to pay back the loan amount.
As we seek to protect ourselves financially, we should remember that banks and lenders are technically businesses too. They will seek protection just as any business-owner would seeking a loan. So, consider this a request for ‘back up’ or some sort of reassurance from the lender.
4: Character
This generally refers to constancy.
How long have you been in business?
Do you have a decent record of paying your bills?
The credit score of your business is very crucial for bank lenders to determine how reliable you are in terms of reimbursing your debts.
Considering the above, we have some ways by which you can improve the odds of loan approval:
- Have a well-written business plan
Regardless of whether you are approaching an investor, bank or a local money lender, you won’t be granted a loan unless you can assure the lender that you can reimburse the borrowed amount on time.
In such scenarios, you can persuade your lender by showing them a well-written business plan detailing your strategy. You should include the following in your business plan:
- Employee salary
- Payment of clients
- Inventory purchase costs
- Other expenditures
- Profit
- Future plans
- Review your credit history
One of the first things you must do in order to increase the chances of your loan approval is to re-examine your credit report. It’s important for you to know what is in the report and what the status of your credit score is.
By assessing your credit score the lender will ascertain whether your business should be granted a loan or not. If your credit score is good, the chances of being approved for a loan is high.
Apart from this, look for mistakes or erroneous information in your credit history. If you notice any errors you should have it corrected immediately.
Any error can be corrected on your credit report in one of two ways. You can either get in touch with the creditor and request they make corrections, or you can contact the credit bureau to examine the error.
- Find out how much you need
Small business loans can be availed in various sums. You don’t have to ask a loan specialist, “How much should I borrow?” Instead, calculate the exact amount that you require.
For example, if you request a very small amount then you might not be able to achieve your business objectives.
If you request for a large amount, you could end up paying a lot in the form of unnecessary interest.
To determine the amount you need to borrow first, list all the costs, including working costs, overhead costs, as well as daily expenses.
Now, plan the amount that you will make in deals throughout the same period. The distinction between the two sums is the amount you require the loan to be.
- Reach out
Before applying for a business loan, it’s very important to do thorough research. Research all the lenders and then compare them on the basis of fees charged, interest rates, loan tenure and other additional charges.
Choose the right option for yourself as well as your business, one where you can save even on interest.
- Choose the right loan
Remembering why you need a loan in the first place, will help you choose the right type of loan for your business. Obviously, if you want funds for your car, you will go to a lender who specialises in dealing with car loans as this will make the process easier and there are chances that your loan will be approved faster.
While taking out a loan make sure that you check for PPI. Millions in the UK have been mis-sold PPI policies along with loans or mortgages, so make sure that something similar has not happened to you.
- Be ready with your documents
Any lender can ask for your past tax returns and your debt-to-equity ratio. Be honest with that. They can also ask you for a business licence, the account statement of your bank and other necessary documents as well.
Be prepared with all such documents in order to get your loan approved by a lender.
What To Do If Your Loan Application Is Rejected?
The first thing that you should do is get in touch with your bank or money lender and find out the exact reason for the rejection of your loan application. The most basic reason for rejecting a loan is if the loan applicant does not fulfil the eligibility criteria for a particular loan.
If your loan was rejected because of a mistake with your submitted paperwork, then that can be rectified.
If you have limited loan options from conventional or peer-to-peer sources, you could look towards crowdfunding as a source of capital for your business.
