Did you know that one of the main reasons that startups fail is because they run out of cash?
Whether you’re thinking of starting a new business or are running one already, you need to think about finances. You may need to arrange for funds to keep your business running when you haven’t started making a profit.
Some entrepreneurs may have their own savings to depend on while others may seek help from friends or family. But if these aren’t realistic options for you, you could opt for small business credit or loans.
But here’s the tricky part: Getting small business credit isn’t easy. You can’t expect to go to the bank, finish your paperwork, and get approved right away.
If your paperwork isn’t correct or isn’t well-organized, it may be hard for you to get credit for your small business. In this post, let’s discuss some strategies to help you get small business credit more easily.
Small Business Credit: How to Get Approval More Easily
When you’re applying for a small business loan, you also need to think from the perspective of the lenders. If the roles were reversed, would you be confident in giving a loan to finance your business idea? When you flip the script, you’ll be able to see the situation without much bias.
Here are a few tips that will help you navigate the process of getting credit approved for your small business:
1. Choose an Investment-Friendly Business Structure
Investors prefer entities that minimize their risk and offer a liability shield. Compared to other business structures, only Corporations provide a true shield against liabilities. Additionally, you can also issue voting or non-voting shares in Corporations.
You can choose to offer only a few shares to selected shareholders or make a public offering. Overall, the sale of stocks offers infinite growth opportunities which makes it easy for you to attract investors for Corporations.
If you need help in forming your own Corporation, you can reach out to agencies like GovDocFiling. They can help you expedite your filing process and get all the paperwork done in a hassle-free manner.
2. Deal with Personal and Business Credit History
To check your creditworthiness, your credit history is extremely important. It gives lenders an idea about your ability to pay back the loan and understand the risk involved in extending credit.
While you may want to keep your personal and business finances separate, lenders may have a different perspective. Since your personal financial situation may directly impact your business, they are likely to evaluate your personal credit history before extending credit.
To make it easier to get a loan, make sure you are paying your bills regularly on time and using fewer pre-approved credit lines. These are two factors that make up the bulk of your credit score.
Check your credit score beforehand and try to bump it up to improve your chances of getting a small business loan. Ideally, you should try to get a score that is 720 or higher. If your credit score is lower than 660, you are likely to have a tough time getting a loan from traditional lenders.
In some cases, lenders may also ask for collateral if your credit score isn’t high enough. Real estate is most commonly used as collateral. However, you can also use high-value inventory, vehicles, and equipment as collateral. Keep in mind that you may lose your collateral if you are unable to pay your loan, so choose it wisely.
3. Explore All Borrowing Options
When it comes to getting credit, small business owners naturally gravitate toward banks. It is understandable since it is where they may have their bank and savings accounts. But if it seems like there are many hiccups on the road, there are other borrowing options available as well.
Here are some other ways you can get credit:
- Business credit card
- Microlending programs
- Online lenders
- Small Business Administration (SBA) grants
- Venture capitalists and angel investors
- Crowdfunding
In case your bank loan doesn’t get approved, you need to have a Plan B in place. Do your research beforehand and explore all of your options to get credit.
4. Prepare a Detailed Financial Plan
Before you reach out to a lender, you need to have a clear idea of how much money you want. Prepare a detailed financial plan that includes the following sections:
- Capital investments
- Administrative expenses
- Cash flow statement
- Business expansion plans
- Repaying strategy
From the lender’s perspective, these details help them determine the overall feasibility of your loan application.
5. Keep Relevant Documents Ready
To speed up the business loan approval process, it is a good idea to keep all the relevant documents handy. Here is a quick checklist of some of the most important documents you may need:
- Income Tax Returns: You should include signed personal and business IT returns for the previous years. It is advisable to keep IT returns for at least the previous two years handy.
- Projected Financial Statements: Keep a detailed projection plan of your finances and income for at least the next year ready. Be prepared to answer questions about how you want to achieve the projection.
- Business Certificate/License: You should keep the original copy of your business license or your certificate of doing business ready.
- Profit and Loss (P&L) Statement: Provide your profit and loss statement for at least the last six months of your loan application.
- Business Lease: Be ready with a business lease copy or a note from your landlord that provides the terms and conditions of the lease.
- Loan Application History: If you have applied for loans in the past, include all the records for them.
Conclusion
Applying for a business loan is a big step for any small business owner. It can be very exciting as well as overwhelming to navigate all of the paperwork and legal processes involved.
Before you get started, it’s a good idea to do your homework. Assess your credit history and work towards improving your credit score.
Additionally, you should also prepare a detailed financial plan and keep all the documentation ready. If there are issues securing credit from a bank, you should be aware of your other borrowing options, including grants, SBA loans, and microlending programs.
Do you have any questions about securing credit for your small business? Please feel free to mention them in the comments section.
Nicola Holder