By Alex Haslam
Are you trying to expand your business but running into a wall? You need money to grow, but you need to grow to generate the money. It’s a real catch-22. That’s where loans come in.
Business loans can be a tricky thing for many small-business owners. Some lenders have tough standards and may be unwilling to take a risk on an unproven venture. However, you can do a few things before applying to increase your chances of scoring the loan you want. Having a good grasp on these fundamentals can help you make your case to lenders and land the loan you need.
1. Make Sure Your Personal Credit is in Order
You might be surprised to learn that your personal credit score can have an impact on getting a business loan, but that’s the reality. If your personal credit score is bad, you may have a hard time getting good options for small business loans. Lenders will look to you as the owner to set the financial tone for the company.
How high of a credit score do you need? Well, companies follow different ranges, but here’s how things generally break down:
- 580–669 is Fair credit. You’ll probably have plenty of options for loans, but the terms may be a little less exciting, and interest rates will likely be higher.
- 670–739 is Good credit. A score in this range will land you more options and better rates.
- 740–799 is Very Good credit. A Very Good credit score makes you a low-risk borrower, which puts you in the driver’s seat.
- 800 and up is Exceptional credit. With Exceptional credit, the sky’s the limit.
There’s no magic trick to raise your credit score before applying for a loan. However, knowing where you stand lets you map out a plan for future improvement and helps you set expectations when you go loan shopping.
2. Have a Plan for Exactly How You’ll Use the Money
The lender is going to ask you how you’ll use the money, and having a well-thought-out answer can help increase your chances of getting approved. But planning for how you’ll use the loan also just makes good business sense.
Start with the basics: are you looking for startup funding, or do you need the money to help fuel an expansion? Maybe you just want a safety net to help catch you in an emergency. In any case, once you have the broad use down, get specific. If you’re using the loan to expand, list out exactly how you’ll allocate it and how the money will help in your efforts.
3. Choose the Type of Loan That Best Meets Your Needs
There are several different types of business loans, and while the choice means you can choose one that meets your unique needs, it can be overwhelming if you’re not familiar with the terminology. Here are some loan types you might encounter:
- Term Loan: This is a pretty standard loan type. You get a chunk of cash up front and repay that cash over a predetermined period. These loans can be quick to get but may require collateral.
- SBA Loan: These are loans guaranteed by the Small Business Administration. They often have lower rates and longer repayment terms than other types, but it can be hard to qualify for these loans.
- Line of Credit: This flexible loan lets you withdraw money as needed up to a limit and pay interest on only what you’ve taken out. This type is great for handling sudden, unexpected costs.
- Merchant Cash Advance: This loan is a lump sum of cash, but instead of making payments on it over a term, you give the lender a percentage of your business’s daily credit and debit sales. These advances are easier to get but can have high costs.
- Microloans: As the name suggests, a microloan is a small loan often offered by nonprofits or mission-based lenders. These loans are usually intended for startups or businesses in disadvantaged communities.
Knowing what type of loan to apply for in advance can help you more quickly get the funds you need and increase your chances of approval.
Whether you’re looking for startup capital for a new business idea or have been in the game a few years and want to expand, a loan can give you the resources you need to meet your goals. Consider these points as you map out your strategy, and you’ll be in a better position to get the loan your business needs to flourish.
Alex Haslam is a freelance writer focusing on small business, consumer technology, and the internet. She earned a Bachelor’s of Science in Entrepreneurship from the University of Utah’s David Eccles School of Business in 2017 and has continued to engage in the world of entrepreneurs and small business ever since. You can find her on Twitter @ahaslam_writing.