4 Ways to Prep for a Stellar Small Business Loan Application

Learning that you’ve been approved for a business loan can be a very exciting day for your business. 

It may mean growth is on the horizon—that the big plans you’ve been dreaming up for ages are finally coming to fruition.

The time leading up to that approval, though? The small business loan application process? Well, that part can be a little stressful, to say the least. There are often so many steps—so many factors to think about! Not to mention the nail-biting waiting game that happens once you’ve hit “send” on your business loan application…

But there’s good news! While the small business loan application process will never be totally stress free, there are a few things you can do now to put yourself in the best possible position—that is, totally confident that the application you submit is as stellar as it can possibly be!

Here are five ways you can prep your small business loan application to set yourself up for success.

1. Analyze Your Credit

As you’ve probably heard by now, your credit score is one of the main criteria that creditors look at when deciding to approve or deny you for a loan. So, beat them to the punch! Go ahead and pull your credit report before you submit your loan application to see what number you’re working with.

Quick Tip: There are three main credit reporting agencies that lenders use—Experian, Equifax, and TransUnion—and they all have a slightly different reporting system, so your results may be different with each one. As you’re preparing to submit a small business loan application, go ahead and pull your reports from all three agencies, just to make sure you don’t miss anything.

When you pull your credit report, check it for any disputable errors. These may include judgements or collections you never knew about, or that are just plain incorrect! If you do find any errors, contact the reporting agency in writing to get it resolved. This process can be tedious, but it can greatly improve your credit score.

If your credit score is accurate, but it’s still not as high as you’d like to see, there are other ways to improve your credit score, including paying down your balances and to always pay your bills on time, now and going forward.

For online lenders, your credit score should be no lower than 550, but the higher, the better—as it will affect both your chances of approval and your interest rates. If your credit score is on the low side, it may be worth delaying your application while you take steps to improve it.

2. Increase Your Cash Flow

When looking over your loan application, lenders pay close attention to your company’s cash flow. After all, owning a small business is costly; you have business expenses like rent, inventory, payroll—and the list goes on. Lenders want to know how these costs will affect your ability to pay back your loan in a timely manner.

Since lenders are usually the last priority on that list, they want to make sure your cash flow margins are wide enough to cover their loan costs. If, after all your monthly expenses are paid, you don’t have much cash left over—your chances of getting approved for a loan won’t be great.

Big expenses inevitably pop up unexpectedly, so lenders want to see that you’ll be able to consistently make your loan payments—even if you get stuck with a leaky roof. So if you’d like to increase your chances of getting your loan application approved, increase your cash flow!

To increase your cash flow quickly, focus on collecting receivables in a more timely manner. You can achieve this by sending invoices electronically, offering online payment options for customers, or even offering a discount to customers who pay early. If all else fails, you can even improve cash flow by slowing down payables so your cash isn’t going out the door quite so fast. (But if you take this latter approach, don’t take it too far. Getting in a delinquent payment situation will only hurt your credit!)

3. Calculate Your Debt Service Coverage Ratio

The best way to determine how much loan you can afford where you stand in terms of cash flow before handing in your application is by calculating your debt service coverage ratio (DSCR). This ratio tells you and your lenders how much cash you have remaining after all your monthly expenses are paid, and will give you a better idea whether you can meet the extra cost of a loan.

Your DSCR can be calculated on either a monthly or annual basis using this simple formula:

Cash Flow / Loan Payment = DSCR

All lenders will require that you have a DSCR of at least 1. However, most lenders will require that you have a DSCR of at least 1.5 or greater.

4. Plan to Offer Collateral

In order for lenders to protect themselves from loan defaults, they often require that you put up some form of collateral.

Sometimes this collateral can come from your business—such as company inventory, cash savings, equipment, or deposits. However, if lenders find your business assets to be inadequate, you may be asked to put up personal assets—such as your car or your family home.

If you don’t have collateral to offer, it doesn’t necessarily mean that you will be ineligible for a loan, but lenders may require that you have a cosigner who can offer some of their assets as leverage instead.

Now is a good time to make yourself aware of the particular risks associated with your potential loan. Even though you don’t plan on defaulting on payments, expected events do happen.

Know Your Options

Remember, as much as you want to appeal to your lenders, you want to make sure any loan you take on is a good fit for your business, too. Pay attention to the options and rates available to you to make sure you’re getting the best loan for both you and your business.
Knowing what loans you’d like to apply for will help you further tailor your application to meet that lender’s specific requirements. With the right loan product paired with your stellar application, you’ll be approved in no time!

About the Author

Thank you to Fundera's Meredith Wood for contributing to the SmartBiz Small Business blog.  She is the Head of Content and Editor-in-Chief at Fundera, an online marketplace for small business loans. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith manages columns on Inc, Entrepreneur, HuffPo and more, and her advice can be seen on Yahoo!, Daily Worth, Fox Business, Amex OPEN, Intuit, the SBA and many more.