External financing plays a critical role in running a business. Whether you're a start-up or a well-established business, there will come a time when you'll need financial assistance to boost cash flow, fuel business growth, or fund various ventures. Both SMBs and large firms turn to banks, investors, online lenders, and even the government for financial support. The problem is that securing adequate financing is not always a given.
According to the 2022 Small Business Credit Survey, 34 percent of the businesses surveyed reported they had applied for financing within the last 12 months. But only 11 percent received all the funding they needed, and 12 percent got no funding at all.
Funders are understandably picky when approving commercial financing applications. They’ll deny your request at the slightest hint that your business might fail to repay the debt. But knowing exactly how lenders, banks, and other funders gauge borrowers, we’ve compiled this list of proven tips to increase your chances of financing approval.
Determine the type of financing you need
The first step in seeking business funding is understanding the financing options available to you. There are many different financing solutions suited to particular situations or businesses. You don't have to be an expert at all of them, but you should at least have some basic knowledge about the financing options that your business can comfortably utilize. Common financing products include:
- Traditional bank loans
- SBA loans
- Lines of credit
- Business cash advance
- Business credit cards
- Vendor/supplier financing
- Asset financing
- Real estate loans
- Factoring solutions
Each type of financing has a unique set of qualifying requirements and terms. So, pick the best option for your business's financial needs and status.
Understand what the lender wants
Having narrowed down on the ideal financing product, the next step is figuring out what the lender will look for when evaluating your application. The lender will determine your eligibility for a particular loan or financing option based on a number of conditions and business attributes, such as:
- Business and personal credit score
- Cash flow
- Industry or niche
- Sales and revenue
- Business history
- Legal contracts and agreements
- Accounts receivable and accounts payable aging
- Business operations
- Debt-to-income ratio
- Debt-service coverage ratio
All these factors help the lender determine your creditworthiness or lending risk. It all comes down to proving that your business is capable and can be trusted to repay the debt.
Different funders have different requirements for financing qualifications and approval. One lender might approve your application for a financing product while another lender won't. For example, some lenders may not consider business credit or debt-to-income ratios when gauging lending risks (this also depends on the financing product), while for others, these are non-negotiable.
Take your time to research potential lenders before making your pick. You can even check your pre-qualification for various financing options with different lenders. Instead of going from lender to lender, you can always check your pre-qualification with Lendzero to gauge your probability of approval with multiple vendors at once. But remember, the most lenient funders are more likely to offer financing with higher costs, shorter repayment periods, and limited flexibility on the agreement terms. So, consider also whether this is a tradeoff worth making.
Make a realistic request
You have to be realistic about the amount you want to borrow. Take a close look at your business budget and come up with a figure that you can comfortably pay back. Ensure that you raise enough money for whatever purpose, but not so much that you won’t afford the stipulated payments.
Lenders can see right through an impractical financing request simply by looking at your business’s past, current, and projected financial performance. If the ask is too ambitious, the lender will probably deny you the full amount or reject the application altogether.
Be honest about your financial situation
Be candid and straightforward when discussing your financial situation with the lender during the application process. Don't be ashamed of some financial blemishes here and there. A few bad marks on your financial or credit record won’t automatically disqualify you from a loan. Besides, the lender will probably uncover any lurking business or finance-related issues during the process anyway. So, it's better to lay everything on the table right at the start to get off on the right foot with the lender.
Create a solid business plan
A business plan is an added advantage even when applying for financing that doesn’t explicitly require one. It shows that you understand your business, industry, and market. More importantly, a well-drafted business plan demonstrates your financial strategy in easily relatable terms such as budgeting, cash flow, and revenue projections. In essence, a business plan gives the lender and yourself a clearer overview of the business from a financial and operational standpoint.
Be prepared to offer a personal guarantee
Your business may lack suitable assets to secure a loan or convincing business credit or cash flow to win over the lender. In such a case, the lender may require you to personally guarantee the loan. A personal guarantee is a legal promise whereby you assume personal responsibility for a dept. Such a guarantee typically involves pledging your personal assets as debt collateral, giving the lender claim to the pledged property if the business fails to repay the loan.
This agreement is actually quite common, even with SBA loans. Lenders go for a personal guarantee because it splits the risk between the business and the owner. Also, a personal guarantee shows the entrepreneur’s willingness to vouch for the business by putting their possessions on the line to assure financial results.
Complete your application
Applying for a loan can be a long and tedious process. And it’s quite easy to miss one or two crucial steps that might disqualify your application.
The lender will need a lot of information about your business, which means gathering, preparing, and submitting several documents such as financial statements, accounting reports, tax returns, and balance sheets. You’ll also have to fill out lengthy loan application forms. This might feel a bit excessive or unnecessary, but every bit of information the lender collects is essential to the process. So, be sure to provide every document and fill out every form the lender needs.
Get digital assistance
If you want to get a small business loan, you have to fill out pre-qualification forms with multiple vendors for various financing products just to find the best deal. Plus, you’ll have to negotiate your way through pre-qualification and pre-approval with every lender. So, you should expect a lot of back-and-forth with lenders.
This process is just too messy, cumbersome, and time-consuming. But we’re living in the digital age; surely, applying for a loan can be much easier and faster.
Instead of seeking and negotiating with lenders (without any guarantees of financing), you can simply look up the financing your business qualifies for online. Lendzero lists all the financing products your business can access from various vendors in only a few clicks. What's more, all the products are pre-negotiated, so there's no haggling with lenders for a loan or better terms. We've designed the platform as an easier, faster, and more organized way of checking pre-qualifications for multiple financing products from different funders.
Find the right financing solutions to help your business thrive with Lendzero. Sign up for free and discover incredible financing deals right at your fingertips.