As a small business owner, chances are you’ve needed to borrow money at one point or another—whether that’s through a term loan, a line of credit, or a specialized product like equipment financing.
According to the National Association of Small Business’s 2015 report, 73% of businesses surveyed had received some type of outside financing in 2015 to meet their capital needs. To grow or expand your business, you need to have a source of extra cash… And for many businesses that means filling out a business credit application.
But applications can be frustrating and time-consuming, and too often, small businesses are rejected: 39% of businesses applying for a loan from an alternative lender don’t get approved, while only 1 in 5 small business owners can qualify for a loan from a big bank.
We’ve gathered information about 17 ways you can help strengthen your business credit application so that you have the best chance of succeeding in getting the financing you need.
The better you can describe your business and your need for a loan, the stronger your business credit application will be.
Think about why you need the loan and how exactly you’ll use the money:
Do you want to hire a new employee with expertise in a certain area that your current team is lacking? Do you need new equipment? Do you want to introduce a brand new product or more inventory. Or try a different marketing campaign?
Whatever the reason, the use of your loan should make your business more profitable in the long term.
Your story should include some bragging points, too.
What sets you apart from the competition and makes your business worthy of a loan? If you’ve successfully used financing in the past to grow your business, you can talk about that, too.
You should know your business and your personal credit scores by heart.
(If you don’t, look them up now.)
Websites like AnnualCreditReport.com and CreditKarma let you look up your personal credit score for free. For your business credit score, you’ll need to request a credit report from Experian, Equifax, or Dun & Bradstreet.
Your credit scores are one of the major factors that lenders use in evaluating your business credit application. A score of at least 550 is required by most alternative lenders, and above 640 is prefered.
They’re used to decide not only if you should be approved in the first place, but also what the terms of the loan will be if you get approved.
The business owner’s personal credit score has the most significant impact on loan APR, according to our State of Online Small Business Lending report. And if your business has more than one owner, each owner’s credit score will be taken into account.
One of the advantages to checking your credit score frequently—other than that you should know where you stand when putting together your business credit application—is that you’ll notice any errors and be able to dispute them in time.
Credit reporting bureaus can make mistakes, whether they entered your social security number incorrectly or failed to remove a debt you’ve already paid from your report. If you come across an error, you’ll need to contact the bureau (or the collection agency) in writing.
Credit scores get calculated with a number of inputs, including the types of credit you’ve applied for, the number of new accounts and inquiries, and the amount of credit you use as a percentage of the amount available to you.
But by far the most influential factor is your payment history: whether or not you’ve paid your bills on time consistently.
If you have just one recent late payment, it can drop your score by up to 100 points, depending on how high your credit rating was to begin with.
One of the best things you can do to help your business credit application is to pay off any outstanding late payments. They’ll still show up on your report, unfortunately, but this will keep them from hurting your credit score any further.
If a lien is on your business, it means that someone has called dibs on it and its property… If you default on their loan.
There are two types of liens: tax liens, where the IRS has placed the lien, and UCC (Uniform Commercial Code) liens, where a bank or a lender has placed the lien.
A tax lien is worse than a UCC lien, because it means that you neglected to pay your business taxes on time and in full and you didn’t work out a payment plan with the IRS.
If you have a tax lien slapped onto your report, you’ll find it very, very difficult to receive any type of financing, and you need to work out a payment plan with the IRS immediately.
Once you’ve paid the debt in full, the lien will disappear from your report.
A UCC lien can happen to anyone who’s previously received a loan from a bank or an alternative lender, and sometimes businesses might have a UCC lien without even realizing it. You should write to your state’s Secretary of State office to find out whether or not you’re in the clear.
If a lender did sneak a lien onto your business, you’ll need to contact them to get it removed.
If your business cash flow changes over the course of the year—maybe you work in a tourist hotspot and get more business during the summer—make sure you apply for a loan during or just after your best season.
Business credit applications almost always ask for bank statements, and if you apply during a period of time when business is lagging—which is tempting, because you’re probably less busy—your statements won’t show how well your business has really been doing.
Remember the tip about liens? That whole idea of people lining up to seize your property if you default on a loan can apply to landlords, too.
When you lease office space from a landlord, you give them first right to your property if you stop being able to pay your rent.
For some loan applications, like for an SBA loan, your landlord will be required to sign a waiver known as a Landlord Subordination Agreement, handing that prized first spot in line over to the lender.
As you can imagine, many landlords aren’t too happy about this, so you might need to talk to them about why you need the loan and how it will benefit them.
They want your business to do well so you won’t ever stop paying rent, after all!
Take that story you crafted about your business and your need for a loan, and put it together with information about your expertise and education.
This could include a resume, a diploma, a certification, a professional license, and/or any professional awards you’ve won over the course of your career.
You can also talk about the history of your business and its finances. The more information you’re able to provide, the better equipped the lender will be to evaluate your application and your creditworthiness.
Loan agreement forms can be complex documents with lots of fine print about APR, payment penalties and schedules (including prepayment penalties), and questions about your own qualifications.
If there’s any part of the document that you don’t fully understand, or aren’t sure how to answer, you should think about hiring a lawyer to read through it with you. It can save you a lot of trouble—and money—in the long run.
When drawing up your business plan, it’s helpful to think of splitting it into three parts: historic, competitive, and projected.
The historic section will talk about your business’s finances in the past and present: your sales volumes, your product lines, your prices, your revenues. It’ll also include information about your employees, any outstanding debt, and an analysis of cash flow.
The competitive section will break down the rest of your market and your industry. What other companies are doing the same thing in your area? How are you different?
The projected business plan will deal with the future: what will you do with the money from the loan? How will it affect your sales, your profit margins, and your payroll expenses? What will your future cash flow look like with the loan payments taken into account?
Don’t be too optimistic about how much higher your sales and revenue will be after receiving the loan. You want to show stability and you want to be realistic.
Are you sure that there’s a market for that new product or increase in services?
Remember that if you receive financing, you’re entering into a sustained relationship with the lender, and you’ll need to continue making payments over a period of time. Don’t make promises you can’t keep.
A better way to impress the lender with your figures is to show proof that you have a healthy cash flow already and that you systematically review your budget to make sure that you are reducing costs whenever possible.
This might seem obvious, but the more money you have in your business bank account, the better.
You should aim to have about three months of operating expenses—including your potential loan payments—in the bank when you apply. This shows the lender that, even if disaster strikes, you’ll be able to make your payments.
If you’re only looking for a small loan—say, $5,000 or $10,000—don’t apply for a loan with an average awarded amount of $250,000.
Lenders might turn away business credit applications asking for small amounts of money, because it costs them to process a loan, and these costs are usually fixed.
This means that they’ll earn less money from a small loan than they would from a bigger loan.
Instead, look into lenders that work with smaller loans, like the SBA’s Microloan program.
Don’t be afraid to ask your loan officer questions: it makes you look involved and serious about the loan process, and also suggests that you’re thinking over all aspects carefully. A borrower who understands the loan completely is less likely to run into unforeseen obstacles (like prepayment fees) that might cause them to miss payments.
Good questions to ask the officer might involve payment schedules, payment methods, and fees.
You can also ask about loan renewal options. Some lenders might offer pre-approved future loans for more money or better interest rates, provided that you’ve made all your payments for the first loan in full and on time.
If you’re planning to use collateral, like real estate, to apply for a loan, it’s helpful to have it independently appraised before you apply.
Some lenders and banks will require a third-party appraisal of your collateral’s market value before accepting it—otherwise, they don’t know whether or not it’s worthy of backing your loan.
The higher the loan amount, the longer you’ll spend waiting to receive it.
This time might be spent in collecting more documentation (an SBA loan, which has some of the most favorable rates, requires much more documentation than short-term loans do), or in waiting for your loan to be approved, or both.
So if you need funding in two days, the good news is that there are lenders that will be able to provide that for you, as long as your finances meet a certain minimum.
But if you want the best possible loan, with low interest rates and a flexible payment schedule, you’ll need to think in terms of weeks or months instead of days.
Your business’s Yelp reviews or your employees’ LinkedIn profiles might be evaluated by alternative lenders as part of your loan application.
This isn’t that common, but lenders who check out your social media are looking to get a fuller picture of your business: what is your relationship with clients like on social media? Are you part of a wider network? Do you seem invested in your business? How are your products or services rated by the public?
It’s worth paying attention to your social media, even outside the context of a business credit application.
If a customer complains on Yelp, reach out to him or her, and show that you care about your customers and are willing to incorporate their feedback. Interact with other professionals in your industry on LinkedIn or Twitter.
If nothing else, it could win you some new customers!
Above all, remember to be professional and positive when dealing with lenders.
Respond to them promptly, organize your paperwork well, and show that you respect their judgments.
If you’re rejected, ask how you could have made a stronger application and make those improvements for next time.