Every business needs capital to fund its operations. This is especially true during the crucial startup phase and later when a company begins realizing its expansionary ambitions.
If you’re an entrepreneur with a great business plan and potential customers lined up or an innovative new product to bring to market, a small business loan may be the perfect solution to take your business to the next level.
Keep reading to take a closer look at how small business loans work and what you’ll need to assemble before you apply.
How Small Business Loans Work?
A small business loan is specially designed with entrepreneurs in mind.
Many small to medium-sized businesses face challenges receiving approval for traditional bank loans or pay high APRs for the privilege. This makes small business loans from specialized providers and alternative lenders an excellent choice.
- The approval rate for small business loans at big banks was 28.3% in January
- By contrast, institutional lenders approved 66.4% of loans and alternative lenders (for clients with lower credit scores) approved 50.4% of small business loans in the same month.
If you’ve tried unsuccessfully to obtain business financing from a large bank, don’t lose hope. There are plenty of small business loan providers out there. Moreover, with interest rates falling in 2021 you’re more likely to secure a favorable APR.
Raising Your Likelihood Of Loan Approval
To increase your chances of being approved for any kind of credit it’s always useful to know what criteria the credit issuer applies when assessing your application.
In terms of small business loans there are three major factors that creditors take into consideration: your business plan, your 2019 financial results, and your creditworthiness.
Go through each of these aspects one by one to comfortably prepare your loan application in 2021.
Brush Up Your Business Plan
Lenders offering business loans need to know that your company has a good chance of growing and attaining profitability over time. For a startup, a big part of that assurance comes from a comprehensive, professional business plan.
- A business plan that contains exciting ideas matched with financials that make sense along with realistic goals and milestones will inspire confidence in any lender.
- Taking some time to review your business plan, and consulting a financial advisor if necessary, is always a good investment.
Ultimately, if your loan provider believes that your chances of success are good, they’ll be more likely to approve your loan with the knowledge that you’ll be able to make regular repayments.
Prepare Your Financial Statements
Your business plan lays out what you plan to do with the capital – but your financial statements reveal how your business performed over the past year.
Ideally, your loan provider wants to see a dynamic business plan that has been effectively deployed. If your financial results meet or exceed the projections in your business plan you may find it easier to get approved for a small business loan.
Even if your financial results don’t quite measure up to your business plan, demonstrating healthy turnover and good growth prospects can show prospective lenders that you’re on the right track.
Keep Your Eyes Open For The Best Loan Terms
It’s important to present a professional business plan and solid financial results to your loan provider. However, they also need to bring something to the table: competitive APRs and favorable terms.
- You should feel free to shop around until you find a loan provider that offers competitive APRs, low fees, and flexible repayment terms.
- The sounder your company’s cash flow and growth prospects, and the healthier your personal credit (if you’re guaranteeing the loan), the better your APR and loan terms will ultimately be.
A quick online search will help you compare available small business loans and uncover a lender that meets your specific borrowing requirements.
A small business loan could be the ideal source of capital for your growing enterprise if you prepare an application that has a good chance of being approved.
By submitting a detailed business plan, demonstrating solid financials, and shopping around to find the best loan company, you’ll increase your chances of approval. Successful approval could eventually be the turning point for your business.