Small business owners often need financing to gain access to more working capital, help with cash flow, and allow their business to succeed. But qualifying for business financing likely isn’t something that will happen overnight — becoming eligible for funding usually takes work upfront. That’s where Nav comes in.
In this article, learn all about the loan application process, how to increase your chances of business loan application approval, and mistakes to avoid when applying for financing.
Understanding the Loan Application Process
It’s important to understand what goes into getting small business loans before you start.The process for a loan application can take months, especially for bank loans or loans from the U.S. Small Business Administration. These financing options usually have rigid requirements for applicants and take longer to get funding into business owners’ bank accounts, and may require you to go into the financial institution in person to finalize your application. Online lenders usually have faster and easier applications that are fully digital.
The three biggest determining factors for business loan approval are:
- Time in business: Your business will often need to have been operating for at least two years, but not always.
- Creditworthiness: This factor often refers to both your business and personal credit scores, but it depends on the lender. It’s a good idea to check which credit scores are considered by the lender before applying.
- Annual revenue: You may need $50,000 or more in annual revenue to qualify for business financing.
Business lenders — especially traditional lenders like traditional banks and credit unions — often require good to excellent personal and business credit scores. There are business loans that don’t require high credit scores, but they often have higher annual percentage rates (APRs) and repayment terms. Higher interest rates mean you’ll pay more in monthly payments to borrow money for your business.
You’ll then need to collect your business’s documentation, which will depend on which lender you apply to. In general, you’ll need:
- Business details, like your business name, address, phone number, tax ID, and possibly a business plan outlining how your business does or will operate in the future
- Owner details, like Social Security numbers and physical addresses
- Personal and business financial statements, like bank statements, profit and loss statements, and tax returns
- Details on any collateral you’re putting down, like real estate or machinery
- A personal guarantee, which ensures you personally will pay the money back for the business loan if your business fails to make its loan payments
Once you have gathered all the appropriate information, you may be ready to start the application process. Since every financing provider is different, though, it’s helpful to check with the lender to ensure you have everything you need before starting.
Types of Business Financing
It can help to get an idea of your loan options before you apply. You may qualify for:
- Term loans (like short-term loans, intermediate-term loans, or long-term loans)
- Business lines of credit
- Merchant cash advances
- SBA loans
- Bank loans
- Equipment loans
- Invoice factoring
- Business credit cards
For a more detailed breakdown of the kinds of business financing options out there, see this guide from Nav.
Tips for Improving Your Chances of Approval
There are decisions you can make while you’re searching through your business financing options that will help to boost your chances of getting approved. Here are some of the best things you can do to increase your eligibility.
Make sure it’s the right loan program for your business
The reason your business needs financing will help determine the type of business loan you should pursue. If you need a pool of money you can pull from only when you need — and only pay interest on what you use — a line of credit might make the most sense.
On the other hand, if you’re looking for a large loan amount to pay for startup costs, a term loan might make the most sense. Research your options to make sure you’re applying for the financing that best fits your needs to increase the chances of getting approved.
Using Nav is the easiest and quickest way for small business owners to find the right financing options for their business success. See your options based on your business’s data today.
Request only the loan amount you need
Although it can take some math to get a good estimate, it’s important to apply for only the amount of money your business needs. Applying for too much money might impact your eligibility, your interest rates and terms, and require larger monthly payments, while applying for too little won’t cover your needs. Microloans can be easier for small business owners to qualify for if they don’t need a large lump sum.
Check eligibility requirements
Your eligibility depends largely on your credit history, your annual revenue, and your time in business — but this isn’t always the case. Make sure you check with the specific lender you’re applying for to ensure you meet their requirements ahead of time. Alternative loans tend to have requirements that are easier for some small business owners to reach, so they may be the best option for your business to get approved.
Common Mistakes to Avoid
The road to becoming a business financing borrower can be rocky if you aren’t prepared — but there are several ways to make the ride much smoother. Here are some of the mistakes all business owners will want to keep an eye out for when they’re applying for financing.
1. Having a questionable repayment history
Lenders want to know that you are likely to repay what you borrow, hence where credit scores come into play. If you have poor credit, consider working hard to make on-time payments to any current debts and decrease your debt-to-income ratio, which may help increase your credit scores. Also, check your personal and business credit reports to make sure there aren’t mistakes. If you contact the appropriate credit bureau to fix the mistakes, you may be able to improve your credit history enough to qualify.
To get started on your business credit scores, learn how to establish business credit in this Nav guide.
2. Having too little revenue to repay the loan
You’ll need to make sure you can afford the monthly payments for financing before applying, which requires you to take a look at your cash flow. A good rule to follow is to make sure your total income outweighs your total expenses (including your debt payments) by at least 1.25x. If a lender requires daily or weekly payments, factor those into the calculations.
3. Not having enough collateral
Small business lenders want to know that there is a Plan B if the worst case scenario happens and your business can’t pay back its loan. This often means that lenders require collateral, which is a business or personal asset that you put down that the lender can seize in case of lack of payment. The amount of collateral you need is typically the same value as the amount you borrow. On the plus side, having collateral to secure the loan may also help to lower interest rates you receive.
Common Reasons for Loan Denial
The most common reasons for a business loan denial are typically focused on applying for the wrong financing option. Knowing what you may qualify for — before you apply — is the best way to help increase your chances of approval. Nav is the only place you can see your best financing options based on your business’s details. The more information you provide, the better your financing recommendations will be, so get started today.
Frequently Asked Questions (FAQs) for Business Loan Application Approval
What is the best way to improve my credit score?
There are many ways to increase your credit score, but your repayment history is the largest factor making up your scores. You may improve your credit score by making on-time payments over a period of time, lowering your debt-to-income ratio, and increasing your mix of different types of credit.
How important is a business plan when applying for a loan?
Whether or not you need a business plan before applying for a loan will depend on the type of financing you seek. A traditional lender will often need you to supply a detailed business plan while an alternative or online lender may not have that requirement.
Can I still get a loan if I have bad credit?
There are business financing options that don’t check your credit before deciding on your approval and instead rely on your business revenue, typically from alternative lenders. If your business has a high amount of revenue, you may be able to qualify for financing without going through a credit check.