How to Improve Your Chances of Obtaining a Business Loan
Posted on February 02, 2013 by Michael Martin Leaño
To get your business loan approved, you have to show the bank that your company is financially fit. Doing this, however, isn’t always so easy since so many companies get their applications rejected all the time. Here are a few tips to boost your chances in getting your business loan approved.
Tip #1: Have a clear, updated business plan
To increase your chances of getting approved, prepare a clear business plan. This will allow financial institutions to know more about your business—what your plans are, your company's background, strategies in getting customers, operating plan, legal risks, cash flow and action plans. The lender wants to know where your company is going, how you plan on getting there, and how you plan to use the money you’re borrowing.
Tip #2: Boost your company’s financial condition
Your firm needs to be in good financial form and show that it’s capable of settling the debt. To shape up, reduce overhead and interest expenses, implement a good collection scheme, invoice customers quickly and manage your inventory efficiently to improve your cash flow. Showing the lender that you run a tight ship would demonstrate that loaning money to your business is a good financial move.
Tip #3: Have all your documentation on hand
While a good business plan is necessary to boost your chances, you still need to have all the necessary paperwork on hand. This includes financial statements, tax returns, bank statements, investment certificates (if any), personal and business credit reports, bank statements, business debt schedules, applicable collateral, business licenses, accounts receivables—anything and everything that will show the financial institution that lending to your firm involves only a minimal amount of risk.
Tip #4: Furnish excellent character references
Here’s another way to boost your chances for a business loan—excellent character references like letters of recommendation from previous bosses, a background of healthy borrowing, an impressive work history and a description of your expertise. With these recommendations, you’d be able to show that you’re knowledgeable, reliable, trustworthy, and more importantly, a good borrower.
Tip #5: Know your finances inside out
Remember all the paperwork you have ready? You need to know them thoroughly. You also need to explain the ins and outs of your company’s financial situation, not only to clarify details but also to show you know what you’re doing. The lender will ask finance-related questions like:
- Why are you applying for a loan?
- Why do you need the amount you're asking for?
- How will you use the money?
- What are the other debts your business has?
- How do you plan to repay the debt?
In the same way, inform the lender not only about your company’s stability but also possible risks to show your honesty. Of course, for your financial plan to be sound, the good has to outweigh the bad.
Tip #6: Prepare a repayment plan in case of failure
This is crucial. Your company may be doing very well right now, but the institution wants to know how you intend to repay the loan in case the business goes belly up. You need to provide details on applicable collateral and even the liquidation of assets in case of bankruptcy—any resources that can be used to minimise the lender’s risk and settle the loan. Make sure you provide specifics for each option in the repayment plan.