It’s now easier than ever to start a business.
In fact, it’s now perfectly viable to start a business based on your passion or a hobby, a feat which has never before been possible.
However, many types of businesses hit a point where they require funding to grow and move on to bigger pastures: new hires, equipment, a bigger property, or just an initial investment to purchase the material needed to create their product.
Similarly, in the past, it would have been much more difficult for you to obtain funding for your business as traditional lenders (i.e. the bank) were the only available avenue to obtain a loan. That’s namely because the credit requirements on a bank loan a so high (660-720+).
However, the fintech movement has now born alternative lenders which offer both more fair credit terms and balanced lending criteria as a whole, making it easier than ever to obtain the funding you need to launch or grow your business.
Having said that, there are still some things you’ll want to keep in mind when it comes to applying for a business loan, things that can radically improve your chances of being approved (and how much you’re approved for).
Here are three ways to improve your chances of being approved for an unsecured business loan:
1. Familiarize yourself with the “4 C’s of credit”
Most borrowers don’t know what specific factors lenders look within the umbrella of credit. That’s why you’ll want to familiarize yourself with what’s referred to as the “4 C’s of credit”.
There are four primary factors that lenders look for when reviewing an applicant’s overall credit health:
Collateral
Lenders want to see that you have collateral– any asset such as property or cash savings– you can offer to secure a loan.
Remember, lenders are giving their money to you in exchange for a later repayment plus interest. So, if a borrower defaults on a loan, lenders want to know that they have a way to break even on that investment so they don’t come away with a loss.
However, keep in mind that some alternative lending products don’t require collateral.
Capital
Capital refers to business assets that can be sold. In this case, sold to pay back the loan.
Similarly to collateral, lenders also want to see that you have insurances in place that will allow you to continue making loan payments even if something were to happen to your business.
Capacity
Even before capital or collateral, lenders want to see that your business is producing the revenue necessary to make regular loan payments (and the amount of each payment).
That’s where capital comes in, which refers to your capacity to generate the revenue needed to pay your loan back.
Character
Character is an odd term but it essentially refers to your credit history. Factors include:
* Your total debt
* Payment history
* Available credit
These factors, taken together, are your “character” as it pertains to your credit usage.
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2. Clean up your credit report (look for erroneous accounts, details, and judgments)
Speaking of credit history, you’ll want to take a deep dive into your credit report to clean things up.
As we talked about earlier, while traditional lenders still hold credit up as their primary lending criteria, new alternative lenders have a more balanced approach.
However, credit is still an important part of every lender’s equation.
The important point to keep in mind here is that it’s now less about having a sky-high credit score and more about making sure you clean up anything on your report which could hamper your chance of approval.
What should you be looking out for? Things like:
* Foreclosures and bankruptcy
* Erroneous accounts or erroneous details on accounts
* Judgments or liens you’re not aware of (or which should have been removed by now)
* Accounts still open which can and should be closed
The above items won’t cause a denial, however, they will flag your application. Of course, they’re not exactly easy to remove from your credit report.
However, tax liens and judgments can also ding you and they can be taken care of– and removed from your credit report– in most cases. Plus, they often sneak up on people and can sit on your credit report for some time before you ever know they’re there.
3. Make sure your “just in case” documents are in order
While it’s true that most lenders require nothing more than a short application and your recent business bank account statements to apply, the truth is that will often only get you in the door.
To maximize your chances of being approved for a small business loan, you should ideally have several other documents in order so you can provide them to your lender of choice quickly.
Here are some of the documents that your lender might request:
* Business licenses, proof of ownership, or EIN/tax ID
* Business health and performance reports such as your profit & loss statement, balance sheet, and debt schedule
* Property lease agreement and landlord contact information
* Personal or business tax returns
Keep in mind that rarely, if ever, will all of these documents be requested. Typically, only a few of these documents will be requested by your lender.
However, by having them together ahead of time you’ll not only give yourself the best chance of approval– ensuring you can readily support the information you reported in your application quickly and clearly– but streamline the application process so you can get your funds faster.
Also, a little EIN lookup tip: If you’re applying for a working capital loan, you’ll need your EIN/tax ID (same thing, two different names). However, if you no longer have your original documentation, you can’t get the number online. The easiest way to get it if is by simply calling the IRS directly at 1-800-829-4933.
It’s never been easier for small business owners to obtain the funding they need to grow their business.
And while credit isn’t as much of a make-or-break factor with new alternative lenders as it is with traditional banks, there are still several things you need to keep in mind to maximize your chance of approval when applying.
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