Outside funding is often a vital ingredient for a small business’s growth and success. Whether you’re looking to expand your operations, invest in new equipment, or weather unexpected challenges, having access to capital may be a game-changer.
However, navigating the world of business loans can be daunting, especially when trying to maximize your borrowing power. Here are a few strategies to consider when getting ready to qualify for a small business loan that may help you qualify for the amount you need and help the process go more smoothly.
Determine why you need funding
What you will ultimately do with the funding you receive may help to determine the best kinds of loans to apply for and even the amount you could qualify for. So it may seem obvious, but this is an important step in the process.
Some common reasons why businesses apply for funding are to shore up working capital, buy machinery, hire more staff, or even refinance existing loans to reduce monthly costs.
Know how much you need to borrow
Again, it may seem obvious, but you’ll need to know your specific numbers in order to make sure you are really getting what you need to cover what you plan to do with your small business loan.
Take time to look at your business plan and current financial situation before you start an application. Not knowing how much you need may stop the process dead in its tracks. Work with a financial professional to determine how much you need to reach your financial goals if you’re not sure.
Review your business and personal credit scores
Your credit score not only impacts your ability to secure a loan, but it also influences certain factors like your interest rate and, in some cases, the terms of your repayment. A credit score of about 700 is generally considered good and significantly increases your chance of being approved for a loan.
Before you apply for a small business loan, take some time to get your personal credit history in order. Consider requesting your credit report from each of the major credit reporting agencies.
Business Credit Reports Explained outlines how your score is calculated and how you may be able to raise it. Once you have your reports, review them closely. If you see any errors on your credit reports, you may be able to dispute the mistakes.
If you’ve found that your scores are low, there are several ways to improve your FICO SBSS Score.
If you’ve determined that your score needs to be higher to qualify for an SBA loan, there are steps you may take to raise your numbers. Review the items below to help get started.
Establish business credit
To help build your FICO SBSS score and give lenders a snapshot of your business creditworthiness, you’ll generally need to establish a strong business credit profile. The first step is to apply for a DUNS number through Dun & Bradstreet®.
Credit agencies use your DUNS number to create your business credit file, similar to how they use your social security number to identify your personal credit reports. It may help you establish credibility and trust with lenders, creditors, and suppliers. By having a DUNS number, your small business is typically better able to differentiate itself from others and demonstrate its creditworthiness.
To learn how to establish and why this number is important, visit Why Does Your Business Need a DUNS Number.
Work with vendors to establish history
Next, contact vendors that you’ve worked with and ask them to report your positive history of payments to the business credit bureaus. A lack of history or negative history may negatively impact your credit score and your ability to qualify for the loan you need.
Open a business checking account
If you don’t already have a business checking account, consider opening one ASAP. In addition to helping establish business credit, you’ll be separating your finances, making bookkeeping and accounting much easier.
Apply for a business credit card
Apply for a business credit card, to be used for business purposes only. This also may help make your bookkeeping easier, as well as better establish credit for your business. Here are a few tips to help you configure your expenses accurately: How to Categorize Expenses for Small Business.
Watch outstanding debt
Outstanding debt has a big impact on your SBSS Score. Focus on first paying off high-interest-rate debt, such as student loans and credit card debt. Then, pay down other debt such as mortgage and auto loans. Going forward, try to pay your credit card bills in full each month so you don’t carry a balance.
Review your borrowing options
Review commercial banks available to you, including your own business bank. A non-bank financial company like SmartBiz® can be a valuable resource. Instead of going bank to bank, our professionals match you with the one most likely to fund via the SmartBiz streamlined application and our stellar customer service. This helps you save time and frustration in the process and lets you continue to focus on running your small business.
Popular types of funding
SBA 7(a) Loans
A Small Business Administration (SBA) 7(a) loan is generally known as “the gold standard” in small business financing.
SBA 7(a) loans may be a lifeline for small businesses, offering financial assistance, favorable terms, and government support. They provide small businesses with access to much-needed capital that may be challenging to obtain through traditional lending channels. These loans may be used for everything from starting a new business to purchasing equipment or inventory, expanding operations, or even refinancing existing debt.
These loans typically come with favorable terms compared to conventional loans. And while specific terms may vary, SBA loans generally offer longer repayment periods, lower down payments, and more flexible collateral requirements. These terms generally help ease the financial burden on small businesses and improve their cash flow.
Bank term loans
A bank term loan is a short-term, fixed-rate loan with stable monthly payments. These loans are typically a great fit when you need funds quickly and want to lock in your interest rate. The same streamlined process is used for term loans through banks in the SmartBiz network.
Proceeds from a bank term loan can be used in a variety of ways to meet your business goals. Funds may be used for working capital, debt refinance, new equipment purchase, and more. Additionally, paying off a bank term loan responsibly helps to build business credit.
Lines of credit
Unlike traditional loans, a line of credit provide access to funds that may be used as needed, up to a predetermined credit limit. You only pay interest on what you use. And they often come with lower interest rates compared to other forms of financing, such as credit cards or short-term loans, making them a cost-effective option for small businesses looking for ongoing access to funds.
A line of credit may serve as a valuable tool for managing working capital, providing a safety net for businesses to handle fluctuations in revenue or seasonal variations in cash flow. Small business owners may use the line of credit to bridge the gap between receivables and payables, ensuring smooth operations and reducing the risk of liquidity challenges.
Don’t leave money on the table
If your business experienced a decline in total receipts in 2020 and/or 2021, but you retained your employees, you may be able to secure a payroll tax refund through SmartBiz’s trusted partners*. The rules for the Employee Retention Credit (ERC) have been expanded to include employers who received loans under the Paycheck Protection Program (PPP), as well as those who don’t. The ERC is not a loan that needs to be repaid, see the eligibility rules and learn more about how SmartBiz can help claim your credit.
*Tax consulting services provided by a third party (“Provider”), subject to Provider’s terms and conditions. Fees apply. See Provider’s terms and conditions for details.