It’s estimated that big banks only approve about 26.9 percent of small business loans applied for. That’s a disheartening number considering the number of new small businesses opening each year.
While this is a hurdle for many businesses, it is possible to acquire the money needed for operations. The best way to increase the likelihood your loan application is approved is to be prepared.
Keep reading to learn what you need to do to improve your chances of getting a business loan from a bank.
1. Consider Why You Need the Loan
It’s important to think about this, as this is one of the first questions a potential lender is going to ask. In most situations, your reason for needing a loan is going to fall into one of the following categories:
- Starting a business
- Growing a business
- Manage day-to-day expenses
- Create a safety cushion
If you are unsure of why you need the loan, there’s no point in applying for a loan yet. This is a vital piece of information you need to have.
2. Figure Out What Type of Loan is Right for Your Business
This is often confusing as there are several options to choose from. If you don’t know where to begin, you may want to reach out for some help from service providers such as Courtney Lanier Sarofim.
In most cases, the reason you need a loan is going to help you figure out the type of loan to apply for.
If you are starting a new business, it’s almost impossible to acquire a loan during your first year of operation. All lenders are going to require cash flow to ensure you can repay the amount borrowed. This means that most startups are disqualified for financing.
Instead, you are going to have to rely on crowdfunding, a microloan from nonprofit lenders, personal loans, borrowing from family and friends, and business credit cards.
If you have an established business with over a year of revenue and history, you have even more financing options. For example, at this point, you may also be able to get an SBA loan, invoice factoring, business lines of credit, and term loans.
2. What You Need for Getting a Business Loan from a Bank
Banks have specific requirements for small businesses applying for a loan. You should only try to get this type of loan when you meet these criteria:
- You don’t require fast cash
- Your credit is good
- You have collateral
Some of the traditional bank loan options include commercial mortgages for buying or refinancing property, lines of credit, and term loans. Through banks, the SBA offers small-business loans with the 7(a) loan program, disaster loans, and microloans.
Loans provided by the SBA range from approximately $5,000 up to $5 million based on the business’s needs and plans. The average size of a loan is $371,000.
Most small businesses have a hard time being approved because of factors that include a lower volume of sales or cash reserves, along with no collateral or bad personal credit. Receiving the funding also takes longer than other methods, with two to six months being the generally accepted amount of time; however, banks usually have the lowest APR.
3. Figure Out if You Qualify
Several factors are going to impact if you can qualify for a bank loan. Knowing what these are ahead of time is a must. Some things to consider include:
Your Credit Score
One of the first factors to consider regarding the loans you can qualify for is your credit rating. Make sure you know what your credit score is before applying for a loan from anyone.
Usually, banks are going to require higher credit ratings than other lenders, so keep this mind.
Total Time in Business
Your credit rating is important, but it’s not the only factor that matters. The amount of time your business has been operating is also an important factor.
You should have been in business for at least a year to qualify for the majority of small-business loans and approximately two years for a bank loan.
The Amount of Money You Make
Some online lenders require you to have a minimum revenue each year. This varies from one lender to another. It’s a good idea to find what the requirement is for the bank you want to use, and ensure you meet it before applying.
Ability to Pay the Loan
It’s a good idea to carefully look at the business financials, particularly the cash flow. Evaluate what you can reasonably afford to pay for the loan each month.
To repay your loan comfortably, your total income needs to be a minimum of 1.25 times the total expenses, which includes the new repayment amount.
4. Get Your Documents Ready
After you have compared the options, it is time to apply for the loan that best meets your needs. Depending on the bank that you choose to apply through, you will need the following documents:
- Business legal documents
- Business financial statements
- Personal and business bank statements
- Personal and business tax returns
These documents are required to apply for the loan and be considered for approval.
Getting a Bank Loan for Your Small Business
If you are interested in getting a business loan from a bank, make sure to keep the information here in mind. By doing so, you will have the best chance possible of getting approved.
Remember, requirements from a bank are much more stringent than other lenders. In some cases, going with a different lender may be a more viable option.
If you want to learn more about how to grow your business and ensure it is successful, be sure to read our blog regularly. Doing so will ensure your business has the best chance of success.
