Getting access to credit when you need it is one of the biggest challenges faced by small business owners. According to the Federal Reserve’s recent Small Business Credit Survey, 54% of small business loan applicants were not approved for the full amount they requested, while 23% of applicants were denied for any funding at all.
Why aren’t small business owners getting access to the funds they need? The Federal Reserve cited the following reasons lenders denied loans: insufficient credit history (36%), insufficient collateral (35%), too much debt (30%), poor credit score (27%) and weak business performance (22%).
On the upside, alternative lenders are providing more funding options. Over the past few years, an increasing number of small businesses have secured financing from online lenders. The Federal Reserve reports that 32% of small businesses looking for a loan applied with an online lender in 2018, up from 19% in 2016.
No matter where you’re applying for financing, knowing what a lender is looking for can help you understand where to focus your efforts in order to improve your chances of approval in today’s lending landscape.
How’s your credit?
Loan applicants with good credit are much more likely to secure financing than those that pose a high credit risk. Lenders want to see a positive payment history with vendors, as it leads them to believe they can expect the same from you.
Likewise, they’ll view a negative history as a risk that you won’t be able to make your loan payments. Many vendors don’t report to the business credit report bureaus — be mindful of the ones that do.
Do you know where your credit score stands? Always check both your personal and business credit before you apply for a loan, and fix any errors that may be dragging down your score. Depending on the lender and the type of loan you’re requesting, one or both reports may be pulled as part of the loan approval process.
Not only will your credit scores affect your chances of getting approved for a loan, they can impact your interest rate should you get approved. If either your business or personal credit score is low (below 600 for personal credit), take steps to improve it before you apply for a loan.
How much are you asking for?
It may seem like there’s no right or wrong answer when it comes to the loan amount you’re requesting, but lenders see it differently. Asking for either too much or too little funding can hurt your chances of getting approved for a loan, depending on the type of lender you’re working with.
To truly think like a lender, you need to get specific about the type of lender you’re approaching. Need a loan that’s less than $250,000? Traditional banks may not be your best bet. Historically, they tend to lend higher amounts — and have less experience dealing with loans that may not be backed by collateral.
Alternative lenders, on the other hand, are more likely to lend small amounts, and the application process can be much faster and easier. However, don’t ask for too much (more than you can prove to lenders you can repay). To increase your chances of approval, only ask for as much as you can comfortably pay back.
Does your cash flow support your case?
As it’s often said, cash flow is king — especially when it comes to lending decisions. The strength of your cash flow is one of the primary factors that lenders consider when deciding whether or not to extend you credit. Lenders are looking for a history of positive cash flow, when more money is coming in than going out. Dips into the negative are a red flag that indicate risk.
Does your cash flow prove that you can comfortably cover your loan payments? Lenders want to see that there’s enough money coming in to take care of all of your regular monthly expenses plus your loan payment. Fortunately, there are steps you can take if your cash flow falls a bit short in this regard.
Where is your business going?
If your current cash flow doesn’t prove that you’ll be able to pay back the loan, it’s your job to show lenders how you plan to get to a place where you can. Start by telling potential lenders exactly what you’ll use their funds for.
Laying out a plan for the funds you’re asking for will go a long way to boost a lender’s confidence in your business. What they really want to see is how the borrowed money will help you get to a place where you can comfortably repay the loan.
Cash flow projections can go a long way to illustrate where your company is headed, and show a lender exactly how you’ll cover those loan payments. Sound complicated? It doesn’t have to me. These days, intuitive online tools make tracking, analyzing and projecting your cash flow easier than ever.
How much risk do you represent?
All lenders are essentially risk managers. When assessing your loan application, they’re measuring the level of risk associated with your ability to repay the loan. Strengthening your credit, shoring up your cash flow and showing lenders where your business is headed are smart ways to minimize the risk that you represent, and ultimately improve your chances of getting approved for a small business loan.
Tucker Mathis is the CEO of FINSYNC, a consolidated cash flow management platform focused on helping businesses grow. FINSYNC’s intuitive online tools help automate payments and accounting, and provide valuable insight through cash flow analysis. FINSYNC’s lending network gives businesses access to fast, affordable financing. Connect with Tucker on LinkedIn and follow @FINSYNC on Twitter.