Business loans have become an important aspect of strategies to produce operational efficiency and growth. For Business Owners revenues and profits of their operations take precedence when making decisions. There are many factors that can improve the chance of a loan approval, and similarly there are many factors which diminish approval chances.
In today’s private credit industry, access to capital for business owners has increased. Banks have been cutting their credit availability for small business owners and entrepreneurs. Today’s platform and private credit lenders have derived their own model for lending decisions. Business owners have to be mindful of the plethora of business financing structures available to them online.
Small business loans — what you need to know in order to get funded:
As a business owner and entrepreneur aiming to secure financing, particularly a traditional business loan, performance of operations becomes very important to lenders. On top of this, you should have in place a thorough and detailed explanation for the use of financing. The more detailed the answer you can provide the better the chances you have for attracting financing. Information is essential during the financing process, if the need for funds is related to revenue increases, such as an outstanding contract, you should provide this information to them, to better your chances. Lending requirements vary from lender to lender. Though there maybe massive or very miniscule differences in required documents there are certain documents which are needed at all times.
It is essential to provide the lending company with a business plan or explanation detailing business operations, industry type, and use of required funds. A traditional business plan outlining objectives and goals would provide the lender with a base to begin their analysis which would then lead to analyzing the use of funds. Lenders tend to put a lot of weight on the use of funds.
For secured financing options a business owner should fully disclose capital business assets. Traditional lenders will usually evaluate capital assets to collateralize as security. Unsecured options for financing have become very popular as well. In this case, the performance of your assets as a business unit will be evaluated. Commonly known as cash flow financing, due to the absence of collateral and the fact the lending decision is based on cash flow activity. Positive and increasing cash flow will reflect positively for both options as this depicts the ability to service additional debt taken on. A business enriched with assets can leverage them as collateral for financing, a younger business can still receive financing purely based on cash in and out.
For both unsecured and secured options. The preparation of financial statements and bank statements are important. This serves as the story of your business that lenders will analyze to make a decision. It is important to know your financials inside and out and be prepared for lenders questions regarding the performance depicted on the statements. The aim to do this to analyze cash flow activity, determine capital expenditures, and revenues derived from profits. Lenders require the need of this information to determine your long-term and short term debt to come to a decision. If a business owner presents financial statements showcasing lower leverage of operations and lower debt, lenders will then determine what additional debt would be serviceable in the constraints of revenue generated and expenditures. Historical, interim financials, and recent bank statements must be prepared by the business owner to present to lenders.
Personal credit scores and business credit profiles are very important aspects that credit analysts and lenders tend to focus on as well. This essentially displays your character in regards to debt obligations. Unsecured options will rely on this heavily when securing business financing. Banks generally have more of a stringent policy in regards to credit scores where a 700 is considered necessary. With the augmentation of online lending and boom of private credit, scores below 600 can still receive financing and improve their business. On top of this it is important to stress the importance of tax returns and outstanding balances to entities such as the CRA. Higher balances and taxes outstanding may bring doubt in the mind of lenders, this situation would also contribute to an increase in the risk of a file, which potentially reduces loan approval chances.
With all the suggested information and required documents above, business owners and entrepreneurs should be in good shape to begin the loan process. There will be many questions thrown your way ranging from operational activity to outstanding debt. It is imperative you are prepared with answers for these. Confidence in your business and operations is expressed by your ability to properly communicate to lenders and satisfy their inquisitive process for a loan. Lenders on the debt side, are risk averse, and the better you are able to communicate and clear the risk associated with your business the better chance of an approval you can secure. Deal timelines vary across debt products. Secured options are generally longer due to the extra time taken by lenders to evaluate assets. Unsecured options are essentially capital injections for businesses looking to grow their operations. The short term injection is utilized as a base for long term expansion and growth. Requirements for business loans as mentioned above vary from lender to lender. Some lenders will put more of an emphasis on your credit profile, rather than past performance, or vice versa. Business owners when looking for loans and financing should thoroughly research the options available to them and thus come to a calculated decision by assessing the wide variety of options available to them.
If you have more questions and inquiries regarding debt financing and the variety of options available, we recommend to connect with one of our dedicated account managers. In doing so they will do their level best to provide you with solutions and answers to your questions