How to get approved for business financing
So you’ve looked through your business financing options and thought about which types of loans might work best for your business. It’s also important to understand the factors that may influence your chances of getting approved for funding:
- Your personal credit scoreYour personal credit score is linked to your Social Security number and will affect the terms and interest rates you’re able to get on a loan. Be sure to review your credit report thoroughly and correct any mistakes before submitting your loan application.
- Your business credit scoreYour business credit score is linked to your Employer Identification Number and will also affect the terms and interest rates of your loan.
- Time in business Traditional banks prefer to loan to businesses that have been around for at least two years, which shows that you’re established in your industry. If your business is fairly new, it can help to provide supporting documents to prove you’ll make good on your loan. This could be revenue projections, outstanding invoices or growth projections. You could also leverage personal assets as collateral.
- Cash flow capacity To show lenders that you’re able to repay your debt, you can share your business’ cash flow statements and projections. This information can also be shown through financial statements and tax returns. You want to make it clear that your business has enough incoming cash flow to repay your loan, on time.
When you are ready to apply for business financing, it’s helpful to gather as much supporting documentation as possible to increase your chances of getting approved:
- Personal background (addresses, names used, criminal record, education background)
- Personal income tax returns
- Business tax returns
- Bank statements
- Business plan
- Financial projections
- Loan history
- Use of loan
- Debt schedule
- Legal documents (licenses, registrations, contracts, certifications, etc.)
How much business financing you need
Before applying for business financing, it’s important to look carefully at your business expenses to figure out how much you need to borrow and how much you can afford to repay. You can use the Debt Service Coverage Ratio to calculate what you can afford:
Net operating income / total annual debt = debt service coverage ratio
For example, if your net operating income is $500,000 and your total annual debt is $300,000, your debt service coverage ratio is 1.67. Having a ratio of at least 1.0 will show lenders that you are able to repay your debt.
How to know if you need business financing
Just because you can borrow money, doesn’t mean you should. Consider the opportunities and risks that come with increasing your business funding. Here are some scenarios where it makes sense to apply for business financing:
- You’re starting a new business
- Your business is seasonal
- You’re experiencing cash flow gaps
- You’re experiencing new/increased costs
- You want to grow your business
Whatever your reason, it may also help to consult with a business mentor or look into resources to learn more about the pros and cons of small business loans.
Secure funds for your small business
Whether you’re someone looking to open your own business, or are an experienced business person looking to expand operations, one thing remains the same—you’ll need capital to get things done.
From short-term business loans to equipment financing, there are a lot of small business financing options available. With a little research and planning, you’ll be able to find the right type of funding for your business.