Getting a business loan can be a daunting process, but it doesn't have to be. With the right preparation and knowledge, you can increase your chances of getting the loan you need to grow your business. To calculate the amount of a loan payment you can repay, divide your net operating income by your total annual debt to calculate your debt-service coverage ratio. You'll have a ratio of 1 if your cash flow equals your monthly loan payments.
While a ratio of 1 is acceptable, lenders prefer a ratio of 1.35, which shows that you have a compensation margin built into your finances. Cash flow is another important factor for commercial lenders, as they want to ensure that you have enough revenue and sales to return their money. Your debt-to-income ratio is also vital: the more debt you have, the harder it will be to get approved. For new small business loans, lenders prefer a debt-to-income ratio of 1.35. Applying for a small business loan can be an overwhelming and daunting process that, given the statistics on approval rates, is understandable.
While those numbers aren't good, there are things you can do to potentially improve your chances of getting a small business loan from traditional funding sources. Here's what you might need to adjust before starting the small business loan application process. Alternatively, Square Capital* offers access to funding for small businesses (no need for a lengthy and complicated application process). Here's how to get a small business loan. Get a loan to grow your business.
Regardless of the type of loan you're looking for, there are a number of documents you should have ready before applying for a traditional loan from a small business lender. Loans through Square Capital, on the other hand, don't require a lengthy application. You can also read our tips on how to get noticed at Square Capital, Square's small business funding program, or check here to see if your company is already eligible. Before you decide to opt for small business funding, make sure you know exactly what you're going to use it for. Small business lenders want to have a specific idea about where you're going to use your funds and how that use will help your business grow in the long and short term. Gaining clarity here will also help you analyze factors such as interest rates and loan terms, so you can get the right loan for your business.
Here are five smart ways to use your small business funding. Many lenders want to make sure that you've thought carefully about your growth strategy and operations. That's why a solid business plan is such a crucial document in the small business funding process. Lenders can use your business plan to help them determine if you'll soon be able to pay them back. While qualifying for a loan through Square Capital doesn't require a business plan, having one is a good idea for any small business, especially when it comes to getting things started.
Learn more about creating a business plan. Bad credit makes it harder to get a small business loan. Square analyzes whether you are a healthy and growing company as part of the approval process. However, for many lenders, your credit score is an important factor in deciding whether to accept or reject your loan application. Banks can generally analyze both personal and business credit scores, so make sure that, in both areas, you make payments on time, spend well below your credit limit and keep your accounts open.
In addition, if you don't have a credit history, that could be problematic for some lenders. Cash flow problems are one of the main problems for small businesses, especially those with large operating costs and initial equipment. But if you're applying for a small business loan, you'll want to ensure that your cash flow is constantly kept out of the water. This is especially important in light of your Debt Service Coverage Ratio (DSCR), something that many lenders consider when deciding whether or not to approve your application. Basically, a DSCR is the proportion of cash a company has available to pay off its debt. It's a mathematical equation that allows lenders to know if their company will be able to return their money or not (which is, of course, the most important question).
If your company is struggling with cash flow, see our recent post “Are you having trouble managing cash flow? Some strategies for staying green. Getting a small business loan can be a complicated process, but it doesn't have to be. With Square Loans, the application isn't long, qualified sellers can get funds as soon as the next business day after approval, the refund is made as a fixed percentage of their daily card sales, and the cost of the loan is a fixed dollar amount that never changes. We want to make accessing the funds you need to grow your business as simple and easy as possible. Square's editorial team is dedicated to telling business stories for business owners. Our team comes from a variety of backgrounds and shares a passion for providing information that helps companies start, operate and grow.
The team is based in San Francisco but has collaborators across the country. SBA loans are generally attractive to small business owners because of their guarantees and interest rate limits. A personal guarantee reduces the risk for a lender but for the business owner it can limit the protections offered by their business structure. Try Shopify for free and explore all the tools and services you need to start manage and grow your business. These resource centers can also help you prepare the necessary documentation when applying for your business loan. They usually only require a few months in business unlike traditional banks which tend to have more stringent eligibility requirements. Much of the process of applying for a business loan is methodical but there are steps that entrepreneurs can take before submitting an application that will increase their chances of success. To increase your chances of getting approved for a small business loan: calculate your debt-service coverage ratio; ensure that cash flow is sufficient; maintain good personal and business credit scores; create an effective business plan; understand what type of loan best suits your needs; research different lenders; prepare all necessary documents; understand how much money you need; and know exactly how it will be used.