4 Steps to Prepare the Best Business Loan Application

The act of applying for a small business loan can be intimidating. You are excited about the prospect of obtaining a loan to grow your business, but at the same time, you are worried about making a mistake that could have a negative impact on your finances.

Learning more about a small business loan does not mean you have to apply. Instead, you can use this process to better understand what goes into obtaining a loan, how it could benefit you, and which steps to take if you decide it is the right decision.

Every business is in a unique position. For example, you may be seeking a loan despite the fact that your credit is less than excellent. Or maybe you are buying a home at the same time you are seeking a business loan.

Regardless of your situation, there are things you need to understand about applying for a business loan, before starting the application.

1. Prep your finances before you start

The process of getting started is easier than most people realize. This is all about organizing your finances, knowing your options, and moving forward in the appropriate manner.

Here are two things you want to do before you get started:

Organize your finances

One of the primary fears associated with a small business loan application is the amount of information required. There is no way around this, as every lender requires a variety of information. The U.S. Small Business Administration provides helpful information about loans and the financial documents required to apply for various types of loans.

Know what type of business loans are available, the terms and conditions associated with each one, and the process of applying. It may take some time to collect this information, but it will help you make the best decision going forward.

2. Decide if you want to apply to a local bank or online

Many years ago, the only way to obtain a small business loan was to get in touch with a local lender and let them guide you through the process.

In today’s world, getting an online business loan is also an option. But, what does that mean for you? Where should you start? Let’s break it down:

The benefits of dealing with a local bank:

• Ability to meet face to face throughout the process
• You may already have an existing relationship with the bank
• Opportunity to ask others in your area about their experience with the lender
• A bank loan will always be cheaper than an online loan

The advantages of an online business loan:

• Faster time to funding
• Easier applications
• Ability to connect with multiple lenders via one application
• Options for those with bad credit

Obviously, both products have benefits, but there are only two questions you should really ask yourself to decide where to start your search:

Can I qualify for a bank loan?

Bank loans are notoriously hard to get approved for. You’re going to need a 700+ credit score, strong revenues, profitability, and good cash flow. If this sounds like your business, you should probably start with a bank, as you stand a better chance than most, and to reiterate, a bank loan will always be the lowest cost capital available.

How fast do I need this money?

Even if you think you could get approved by a bank, keep in mind that the process could take weeks, if not months. If you need cash fast, your best option is going to be online. Many online lenders can get you funded in days, and it may be worth it for you to pay a little bit more to meet this immediate need.

Only you can decide which option is best for you and your company, but make sure to be honest with yourself about your approval chances, and what you really need this money for.

3. Think like a lender

You’ve prepped for your loan search, decided where you want to start the search, so lets talk about what lenders will be looking for during this search. Now, every lender has different criteria they use to underwrite, but here are the most common factors these lenders will consider:

• Desired loan amount. Yes, the loan amount you want could affect your chances of finding funding. Most often, lenders will not make a loan greater than eight to 12 percent of your annual revenue. So if you have $50,000 a year in revenue, you’re doing yourself a disservice by asking for a $300,000 loan.
• Loan purpose. What are you going to use this loan for? Depending on your answer, you may not be able to work with certain lenders. For example, if you’re looking to buy out a partner or acquire a new business, you might have more trouble finding a loan than if you were looking for working capital or to expand your business. Be upfront and specific about how you intend to use the funds with any lender.
• Credit score. Your personal credit score is a very important factor in the process. Some lenders have a set threshold that they can work with (only borrowers with a 600+ credit score, or 700+, for example.). You should pull your credit score before you apply, and then ask lenders what their minimum credit score requirement is. This way, neither of you waste your time.
• Annual revenue. Lenders want to know your business is making enough to pay back your loan. The higher your revenue, the better.
• Average bank balance. Not only do lenders want to know how your sales are, but they want to know how you manage the cash coming in. Almost every lender will ask to see your business bank statements to verify what your average bank balance is. They want to know you keep cash on hand, ensuring your business has the funds to cover loan payments.
• The profitability of your business. To reiterate, it’s great if your business has strong sales, and your bank balance is solid, but if your business isn’t profitable, lenders may be hesitant to work with you. How will the loan payment work into this equation? That being said, lack of profitability can happen when businesses experience high-growth, so if you aren’t profitable, you still might have a chance, as long as the other factors are strong.
• Industry. There are some industries that certain lenders deem “riskier,” and every lender is different. Along with asking a lender what their minimum credit score threshold is, ask them if they will work with your industry.

4. Follow best practices

Before you do anything, review the business loan application in its entirety. If you have any questions, reach out to the lender before starting. This will clear the air and improve your chances of avoiding mistakes that delay the process.

As you move through the application, these tips are critical to your success:

• Be truthful and accurate with every bit of information you provide. Lenders will require certain documentation to verify this information (such as your tax returns to verify revenue), so you need to make sure your answers match what these documents reveal.
• Be thorough. More information is always better.
• Don’t delay in providing follow-up information, if required. You want to provide lenders with what they need while your application is still top of mind.

Once you have an application in front of you, the only thing left is to complete it and wait for final word from the lender.