It takes money to make money. Even if you have a great business idea, it will take some initial investment to market it and bring it to fruition. Unsecured small business loans are a popular choice for quick business finance due to their small ticket sizes and faster approval process. However, not every business loan application gets approved, even if you are applying with a financier who has easier lending rules.
In today’s post, we are sharing the bare essentials, which you should get right, to improve your chances of getting a business loan approval
Before we have a fair idea on how to improve chances of business loan approvals, it is also essential to know what are the types of small business loans available in the market:
- Term Loans : Term loans are lump sum loans taken for a fixed term, the repayments are usually made in installments over the loan term, and the installment has both principal as well as interest component, by the end of the term both are paid off. The tenure for these loans can range from a few months to a couple of years depending upon the loan amount and the terms agreed during lending. These are best for larger purchases, equipment, and expansion activities for a business.
- Commercial real estate loans : While lenders offer various types of small business loans. Commercial real estate loans are specifically designed for purchasing of or refinancing commercial real estate for businesses. For rapidly growing businesses, investing in real estate can be a prudent way of growing their business and investing smartly. Banks and financial institutions offer commercial real estate loans to help businesses finance real estate. This is the best small business loan for businesses looking to buy, build, or renovate commercial space for own use or investment purposes.
- Line of Credit : A business line of credit is a revolving credit which can be utilized by the entrepreneur to withdraw cash on credit as and when required for the business. Interest will be charged on the money withdrawn and not the limits carved out for the business. These lines of credits are great for businesses which often require debt funding. Line of credit helps entrepreneurs save time and effort of going through the loan application process on a recurring basis. Although there are many types of small business loans, line of credit is one of the best small business loans on offer currently as it helps businesses to operate efficiently.
- Invoice Financing : This is a great way to receive funds injection into your business. In this type of financing, the entrepreneur can sell off their bills receivables to a lender. These bills receivables or pending invoices are of a future date, and the lender discounts the bills as per terms and conditions and pay-off the entrepreneur. The lender can then collect the money against invoices at a later date. This is a great way to realize invoices quickly if the business is in need of funds, and this helps shorten the cash conversion cycle. These are best for companies with slow paying customers who need immediate cash.
- Equipment financing : This loan as the name suggests is usually taken for purchasing business equipment. However, more often than not, the equipment itself serves as a collateral to the lenders. This helps the lenders hedge their risk associated with lending, as the equipment can be liquidated to recover debts in case of default. For borrowers, this is beneficial as it helps them finance better tech for their businesses which increases productivity, and through its life the increased efficiency makes up for the cost of the equipment. It is the best small business loan for businesses with aging equipment where the entrepreneur doesn’t wish to make a large upfront payment to acquire the equipment.
- Merchant Cash advance : Merchant cash advance is a lump sum given in exchange for a percentage of the future credit or debit card sales. In this type of lending, the lenders understand the usual cash flow in credit or debit card sales for a business, and accordingly a lump sum payment which is recovered by charging a fixed percentage for all future card sales. The timelines and recoverable amount are agreed upon during the application.
- Microloans : These are smaller loans often given to micro businesses. It is often aimed at startups which have small capital requirements in debt form. These days, microloans are being offered by plenty of mainstream lenders, as well as micro finance companies with an aim to serve the underserved unstructured small businesses in the market.
- Personal Loans for business use : As the name suggests, these are personal loans given to the entrepreneurs, for them to utilize these funds in their businesses. These loans are typically given to entrepreneurs whose businesses are fairly new or are high risk for the lenders. By giving the loans to the entrepreneur, the lender mitigates the risk of lending to an entity, and any future repayments, guarantees, liabilities, or default is tied to the entrepreneur and not the business.
- Peer to Peer loans : These loans are funded by individual investors, and not the typical financial institutional lenders. As the name suggests, peer to peer loans or P2P loans are a loan arrangement between the borrowers and the set of people who are lending their money in exchange for an interest consideration. These loans are beneficial for businesses seeking alternative funding and want to bypass traditional lending methods and are able to secure better loan terms than typical loans offered by the financial institutions. While there are plenty of best small business loans available, Peer to peer loans are one of the most innovative types of small business loans!
- Franchise Financing : As the name suggests, this financing option is great for entrepreneurs who want to open a franchise. Opening a franchise of a well established brand is pretty straightforward and doesn’t require the effort to build a business model, work on creating goodwill, and figure out the infrastructure to support the business. However, opening a franchise can be capital intensive. Loans are a great way to fund a franchise business. There are lenders who have designed debt products specifically targeting the franchise businesses, these franchise financing solutions are helpful for bussing entrepreneurs looking to make good returns in the franchise business.
Improve a lackluster credit score
For lenders or any investor, returns are directly proportional to the risk associated with an investment. For a high risk investment, the returns will be high and vice versa. The information regarding your past loans is easily available to the lenders, which makes it really easy for them to understand the risk level associated with lending you the capital. Hence, it becomes imperative to have a good credit score. A good credit score can help you get loans easily at suitable terms and conditions from lenders. If your personal and business credit scores are not in order, there is a high chance that your loan application will get rejected. Worst still, you might be offered a loan with exorbitant interest rates, which will only make it harder for you to repay the loan and further diminish your credit worthiness. So, before applying for a business loan, get your credit report and take steps to improve it. In case you have raises a dispute with the credit bureau, wait for its resolution before applying for a loan, otherwise a lender might deny your loan application based on faulty information.
Make your calculations in advance
If you are starting a new business, assess your financial needs and keep an eye out for lucrative business loan deals even if you do not need the funds immediately. Being aware of your business’s exact capital requirements and institutions that cater to your specific financial needs can speed up the loan approval process significantly. Having a hold on your calculations can help you plan your business expenses efficiently and in turn also help operate the business more effectively. Having a plan always helps, with solid calculations and a good business plan, you can really do well at entrepreneurship and make good returns.
Have a business plan
When planning for a business loan, have a business plan ready to share with the lenders to convince them of your commitment to repayment. The plan should have an executive summary that explains what your business does, and how you plan to make money. Also include a market assessment and data of present business expenditure. A business plan is crucial if you want to succeed at entrepreneurship. Having a business plan on a stand alone may not be enough, having minute details, and data backed research to support your business plan plays a major role in making it a viable and profitable venture.
Get the documentation right
For availing debt funding, the first and foremost thing to put together is the documentation. For any standardized process, especially loans, documentation is essential and an integral part of the process. Having clear documentation can help speed up the process, as documentation helps the lenders understand the risk associated with lending you the money. Based on your documents you can prove your credit worthiness and your repayment capacity to the lender. Bot only this, documentation also forms an integral part of the process as these can protect you as well as the lender in a future scenario. A lender will ask for the most recent years’ profit and loss statements, balance sheets and cash flow statements, so make sure you have them in order. Apart from this, business incorporation certificates, tax filings and address and identity proofs are a pre-requisite for business loan approvals. Check with the lender beforehand and get the documentation right to speed up your business loan approval.
Apply with FinTech lenders like Lendingkart
Traditional ways of securing lending are still prevalent but there are many new players in the lending market who have their USP which makes it logical to consider them as your lending partner. Applying for loans with fintech lenders has several benefits like ease of application, faster application processing, quick disbursal, real time application progress, attractive lending rates, among several other benefits. There are various types of small business loans. If you need a fast business loans, apply with a FinTech lender instead of traditional banks and NBFCs. Where bank and NBFCs take up to 10 days to process a loan application, a FinTech firm like Lendingkart will authorise loan disbursal within 3 days of application and approval. Moreover, FinTech lending comes with several other benefits like minimal processing charges, business loan low interest rates, flexible EMI options, zero prepayment fees and quick renewals.
Explore FinTech lending options and streamline your business loan application process for swift access to funds.
Handling Money Flow
Handling money flow involves managing the movement of financial resources within an organisation. It encompasses budgeting, tracking income and expenses, while ensuring a healthy balance. Effective money management involves setting clear financial goals, prioritising spending, and saving for future needs. This process requires disciplined record-keeping, prudent investment decisions and staying informed about economic trends. Businesses must optimise cash flow to cover operating costs and invest in growth, while they must balance their budgets to secure financial stability. Ultimately, mastering the art of handling money flow is essential for achieving financial security and meeting long-term financial objectives.
Efficient and healthy balance in the operations can enhance the entrepreneur’s ability to manage money flow. For a business, having short turnover cycles indicates that the bills receivables are not pending with the customers for a longer period of time. Apart from having shorter credit and turnover cycles, it is also imperative for an entrepreneur to learn how to manage money at hand efficiently. A good treasury management not only helps operate business efficiently, but also helps in maximizing returns on the money at hand and putting it to a more efficient use. An active and efficient treasury management not only puts extra money to use but also tracks the funds allocated to different purposes and finds a way to ensure that these funds are being utilized with utmost efficiency to ultimately benefit the business venture.
Plan to Re-Pay
When considering a business loan, creating a well-structured repayment plan is essential. Start by assessing your financial capacity, taking into account your business’s cash flow and profits. Establish a clear budget that allocates funds for loan repayment without straining daily operations. Consider a loan term that aligns with your business goals and cash flow, as shorter terms may lead to higher payments but less interest. Shop around for competitive interest rates and favourable terms from various lenders. Regularly monitor your financial performance, making adjustments to your plan as necessary. Effective tips for business loan repayment planning can help entrepreneurs and small business owners develop a sound financial strategy to meet their loan obligations, promote financial stability and sustainable growth.
Having a detailed plan laid out to help you manage your business finance well can enable you to repay your debt obligations faster. To do so, you have to first assess how efficient your business is operating. Secondly, try to understand the cash flows of your business and how you can optimize the cash flows to align with your goals. And lastly, have a solid plan based on the data you have collected with a little wiggle room to ensure that you are utilizing the money most efficiently and at the same time also mitigating some risk exposure to ensure time repayments of your debt obligations.
Doing timely repayments can help your credit score i.e. credibility in the eyes of lenders. This can help you secure loans easily in the future, as having a solid repayment history helps the lenders understand the risk exposure associated with lending you the money better and gives them the confidence that the money lent will be repaid on time. It can also help you secure favorable loan terms and conditions in the future. As your repayment history indicates your loan application as a safe investment to lenders, they may be willing to offer you better loan terms and attractive offers on your future debt relationships with them. Doing this may seem difficult, but with cautiousness and planning well, creating a solid repayment history is not as difficult as it may seem!
Don’t ask many lenders for quotes
One of the key tips for business loan approval is to avoid requesting quotes from too many lenders simultaneously. When you approach numerous lenders at once, it can lead to multiple credit inquiries, which may adversely affect your credit score and give lenders cause for concern. Instead, conduct thorough research to identify a select few lenders whose terms align with your business needs. This focused approach allows you to present a well-prepared application to a targeted group of lenders, improving your chances of approval while safeguarding your credit score. Strategic planning and careful lender selection are essential for a successful business loan application.
You may think of checking out the offers by lenders by asking them for quotes, however the lenders cannot give a quote unless they have your credit history and your application details. But these unlike the queries you make for checking your credit score (soft queries) are hard queries. Hard queries are compulsory and non escapable if you’re applying for a loan, and albeit these are temporary, however having too many hard enquiries in a short span of time can adversely affect your credit score. Hence, it is imperative that you gauge the lending offering without a hard query. You can do so by checking the general rate of interest offered by the financial institutions to weed out any lender that has a higher interest rate offering on their lending products from your list. Secondly, you should always check the general terms and conditions, lenders’ flexibility on loan repayment and tenure, if there are any additional charges in case the borrower wants to close the loan early or on a missed payment. Based on these factors you can try to come to a conclusion of a more suitable lender for your debt financing.
Avoid Negative Balance
Avoiding a negative balance is very important in financial management. It signifies spending within your means, ensuring that expenses don’t exceed income. Maintaining a positive balance in business accounts prevents overdraft fees, penalties, and financial stress. This involves creating and sticking to a budget, tracking expenditures, and prioritising financial responsibilities. For businesses, prudent cash flow management and clear financial planning are essential to prevent negative balances. In a business context, responsible spending, emergency savings, and careful monitoring of account balances are vital. Avoiding negative balances not only ensures financial stability but also enables individuals and businesses to plan for future goals and unexpected financial challenges effectively.
Conclusion
Getting a business loan can be quite an important step toward realizing your entrepreneurial aspirations, but takes careful planning and preparation. Measuring the actions to improve the credit score, carefully undertaking the financial calculations, and writing a comprehensive business plan are considered to make you a trustworthy candidate in the eyes of lenders. It’s an important process because when the loan approval documentation is in order, with all the necessary paperwork arranged correctly and free of errors, it would help to speed up your application in the process and, above all, show you to be professional. Alternatives in lending through FinTech companies present faster approval and more lenient term conditions; hence, this presents as a more attractive option for entrepreneurs in need of faster funding.
Cash flow management also needs to be mastered. It’s not just good for solid operational stability but also a basis for loan repayment. A well-structured repayment plan that matches your cash flow and growth goals can be quite beneficial in establishing your credibility with lenders, as well as ready the way for future financing possibilities. It also makes sense to strategize your loan applications. Instead of enlisting so many inquiries on your credit profile, you should come up with a shortlist of lenders that really suit your business needs. This focused strategy will ensure that you do not damage your credit score while building a compelling argument in front of the selected lenders. Moreover, regular good balances and good financial practices will protect your business against unexpected shocks and drive it toward sustainable growth.
In essence, making the way to getting that business loan is not simple; one has to be careful about credit management, financial planning, and responsible fiscal practices.
All these will ultimately ensure you actually receive the funding that you need but also set the stage for long-term success in your entrepreneurial efforts. Engage with these strategies, and you’ll be aptly prepared to deal with the complexities of business finance, finally turning your vision into a reality.
