5 Things You Need Before Applying for a Business Loan

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Applying for financial products can often feel like a daunting task, especially when you’re just starting out as a business owner. Getting a small business loan isn’t always easy, and if you come unprepared, you’re less likely to get the capital you need, let alone the loan itself.

To improve your odds of getting a business loan from a traditional financing source, like a bank or private broker, make sure you bring the following documents or collateral before applying.

5 Ways to Increase Your Odds of Getting a Business Loan

If you’re an Aussie who wants to shop for the best interest rates, search for Australia business loans through iSelect. But, before doing that, make sure you have the following:

1. Good Credit

Depending on where you live, a “good credit score” could mean 700 (US) or 800 (Australia). The higher your credit score, the more likely you are to get a business loan. The bank may look at both your personal and business credit score, so ensure you’re keeping up with your debts.

2. Additional Collateral

Every lending source wants to reduce its risk when making a loan. One way to do this is by providing additional collateral in the form of the company’s accounts receivable or equipment. Beyond collateral, you’ll be asked for your personal identification and business license.

You’ll want to make sure you’ve registered your business name, either as a sole proprietor, an LLC, or as another business entity. Your business has to be legitimate to take out a loan.

3. Business Documents

Some business loans will require a longer application process than others. For example, an unsecured loan is typically approved within 24 hours, while secured loans can take weeks.

However, if you’re a startup looking for capital, you likely have to apply for a secured loan unless you have impeccable credit (more on that later). Regardless of loan type, you’ll need to draft a business plan. A typically written business plan should have the following information:

  • Up to 2 years of checking/savings/credit card bank statements;
  • More than 2 years worth of tax return documents;
  • Business and personal credit scores;
  • Profit and loss projections and statements;
  • Copies of legal documents, like leases, contracts, or permits.

With a completed business plan, you’ll have a better understanding of why you need the loan.

4. Your “Why”

You won’t get a business loan if you don’t know why you want the money in the first place. Saying “I want to grow my business” is too vague. Try to understand this question from the lender’s perspective: why would they lend you thousands of dollars for your business growth?

The lender has to feel confident that you’ll pay back the loan, so be as accurate as possible. If you want to grow your business by buying a store in California and you already did the research of pricing the lot and the cost to run it (i.e., employees), then they’re more likely to trust you.

5. Low DSCR

A low DSCR (debt-service coverage ratio) is necessary if you want to take on more debt. A DSCR is a calculation that compares the amount of cash a business has on hand in comparison to its debts. If you have more service coverage than debt, you’ll probably be approved.

Cash flow is always a major pain point for small businesses, so you need to prove you’re keeping your head above water in regards to your finances. Otherwise, the lender will confirm that you won’t have enough money left to pay down your loan at the end of the month.

At the same time, a low DSCR doesn’t guarantee approval in this section. The lender may also consider the type of debt you’ve incurred and whether or not this new loan will take priority.

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