As a small business owner, you can use financing to expand inventory, tackle a new project, or hire the right team. In addition to needing to understand your loan options, qualifying for the right loan program for your business can be a challenge. This article highlights the five most important steps to take on your road to improving your business loan eligibility and get the best financing for your business.
The Importance of Business Loans for Startups and Established Businesses
Business financing is often instrumental to the success of small businesses. Businesses need the right cash flow to be able to stock inventory, pay their expenses, and market their products.
There are many types of business loans and financing, like:
- Lines of credit
- Term loans
- Microloans
- Merchant cash advances
- Equipment financing
- Invoice factoring
- U.S. Small Business Administration (SBA) loans
- Business credit cards
If you want to avoid spending days or weeks researching every kind of small business loan, use Nav. Nav helps you find the right financing options for your business by using your business’s data. The more information you provide, the more accurate your results. Nav is the only place you can see what you can qualify for — before you apply.
The Challenges in Securing a Business Loan
Loan qualification is an important consideration for small business owners of all types. Getting a new loan might mean navigating a long application process, finding the right lenders, and negotiating repayment terms. It also means calculating the right loan amount your business needs.
Lenders typically look at three main factors for your business when deciding whether or not you qualify for financing:
SBA loans are notoriously difficult to apply for and qualify for, while online lenders tend to have more flexible requirements for their borrowers.
Steps to Improving Your Business Loan Eligibility
While there’s no silver bullet to ensure you’ll always qualify, there are concrete moves you can make starting today to increase your chances of getting business financing. Let’s take a look at how to improve business loan application eligibility.
1. Improve Your Credit Scores
Both your personal credit scores and business credit scores might be taken into consideration by lenders when you apply for a loan. You’ll typically need good to excellent credit scores on both the personal and business side of things to qualify, but it depends on the lender. (Some online lenders will consider your annual revenue more than your credit scores).
The minimum credit score depends on where you’re applying since each lender has its own requirements. Also, your credit scores can impact the interest rates and repayment terms you get from lenders. A better credit score might mean you’ll pay less to borrow.
2. Establish a Strong Business Credit History
Unlike personal loans, business loans also often require a check of your business credit score. If you aren’t sure where to begin with your business credit scores, learn how to establish business credit in this guide from Nav. Having bad credit — or no credit — for your business can impact your eligibility for business loans. So it’s an important factor to pay attention to before applying for financing.
3. Review Your Business Credit Report Regularly
Because your creditworthiness has such a big impact on your business loan eligibility, it’s important to check your credit reports. Use Nav to check all your business credit reports and scores. When you’re checking, make sure there are no errors in your report — like addresses, phone numbers, incorrect late payments, names, spellings, and anything else that seems off. If there are mistakes, it’s important to contact the credit bureau to fix them as soon as possible.
4. Choose the Right Business Entity
It’s difficult for a sole proprietor to get a business loan, so it’s worth looking into LLC vs. corporation. There are various pros and cons between choosing incorporation and becoming an LLC, so it’s a good idea to research which would work best for you. To save time, use a business formation service. Business formation services guide you through the process of registering your business entity.
Here are some of the best business formation service options:
Great For Free & Fast Incorporation Services
Inc Authority
Inc Authority will get your entity set-up quickly, easily and for FREE. Unlike other incorporation companies, Inc Authority does not charge ANY extra fees to simply set-up your business entity. Only pay state fees.
Cost
- Free*
- *Plus state fees
Entity Types Supported
- LLC
- S-Corp
- C-Corp
- Nonprofit
Noteworthy Perks
- Free LLC, Registered Agent, and EIN/Tax ID
- Free Business Advisor Support
- Premium Business Packages
Great For Legal Advice From Experienced Attorneys
LegalZoom
Get comprehensive business formation options for starting an LLC, corporation, nonprofit, doing business as (DBA), and more. They also offer supplementary services for a new business like registered agent, EIN registration, trademark services, and business compliance coverage.
Cost
Starts at $0 + filing fees
Entity Types Supported
- LLC
- Corporation/INC
- Nonprofit
Noteworthy Perks
- Hands-on Attorney Consultations
- Industry Leader in Online Business Formation
Great For Worry-Free Services & Support
ZenBusiness
Form a legal entity fast with ZenBusiness. Choose your filing option, then fill out your information and ZenBusiness takes care of the rest. Includes add-on services like registered agent, EIN, annual compliance, and expedited filing. Starting at $0 plus state fees.
Cost
Starts at $0 plus state fees.
Entity Types Supported
- LLC
- S-Corp
- C-Corp
Noteworthy Perks
- Verified Filing & Expert Support
- Worry-Free Compliance & 100% Accuracy Guarantee
5. Demonstrate Steady Cash Flow: The Significance of Cash Flow in Loan Eligibility
Cash flow is how much money is coming into (like sales and accounts receivable) and going out (like expenses and accounts payable) of your business. Financial institutions usually look at your bank statements to make sure your business is making enough money to make the monthly payments.
Your working capital and cash flow are two parts of what help lenders decide whether you can afford to pay back a loan. The stronger your operating cash flow is, the more likely you are to be able to pay them back. Use Nav’s Cash Flow Tool to monitor your cash flow and make improvements where needed.
The Role of a Business Plan in Securing a Loan
Not only will you possibly have to hand over financial statements like your balance sheet to potential lenders, but you also might be asked for your business plan. A business plan is a detailed document that explains how your business operates and makes money. Some lenders will want to see your business plan before they are willing to offer you money as reassurance that the business is under good management.
The Role of Collateral in Loan Eligibility
There are two types of loans: unsecured and secured. A secured loan is one where the borrower offers up collateral, like real estate or equipment, that the lender can seize if the business fails to pay back its debt. Typically, the value of collateral is equal to the amount of the loan. Collateral can open up more financing options — securing a loan can make you eligible for more financing options. If you’re able to put down collateral, it might help you to get the financing your business needs.
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Tiffany Verbeck
Digital Marketing Copywriter, Nav
Tiffany Verbeck is a Digital Marketing Copywriter for Nav. She uses the skills she learned from her master’s degree in writing to provide guidance to small businesses trying to navigate the ins-and-outs of financing. Previously, she ran a writing business for three years, and her work has appeared on sites like Business Insider, VaroWorth, and Mission Lane.