It doesn’t take a mind reader to figure out what lenders look for in loan applications. Think about it: if you were about to lend a significant amount of money to someone, what criteria would you look for? Lenders think the same way you do—they only want to extend loans to people who they’re confident will be able to pay them back. The key is to prove to lenders that you and your business are worth it. Make your application stand out with these tips:
I know this may seem like a no-brainer. But ask any group of bankers about the loan applications they’ve received lately, and they’re bound to mention a few that were just laughably bad. Missing documents, unrealistic requests, dishonest credit histories—you name it, and a lender’s probably seen it. It follows that the easiest way to set yourself apart from the pack is to make sure that your application accounts for everything.
Every lending institution has its own loan criteria, but most lenders like to see a few pieces of standard information. For starters, it’s likely that you’ll be asked for at least a year’s worth of tax returns and statements from all of your bank accounts. Projections for the future cash flow of your business are also a must. And if your business is a startup, then prepare to do even more projecting. Lenders want to know that you’ve accounted for all risks involved in launching your company. Far from deterring a would-be lender, assessing the risks of your own business shows lenders that you’ve done your due diligence. For further details on loan requirements, check out Business.USA.gov’s Business Loan Checklist.
“Money talks, but credit has an echo.” — Bob Thaves
Thaves may have been a cartoonist by trade, but he wasn’t kidding about credit. A strong credit score can be critical to a successful loan application. And while it may not sound fair for lenders to reduce you and your financials to a number, can you really blame them? They want to be sure that you’re not only financially prepared to take on new debt, but also to repay it.
The importance of a healthy credit history may tempt you to fudge the details of your financial situation. Don’t fall in that trap. There’s nothing more embarrassing than being caught in a lie by a banker. Not only will you feel silly for having tried to get away with it, but you’ll also be loan-less. It’s a lose-lose situation.
Ask for the right amount.
Needs and wants are two different things, and when you’re applying for a loan, it’s important to distinguish between the two. You may want a larger loan to fund your business, but it’s worth it to start out with a smaller loan that will only pay for what you need. Plus, just because you qualify for a larger loan doesn’t mean you’re truly equipped to handle it. Lenders like to see that you’ve chosen the loan package that’s within you and your company’s capacity to repay. Here’s a simple rule of thumb to help determine whether you’re asking for the right amount:
- When you divide your total monthly housing cost by your total monthly income, the quotient shouldn’t exceed 0.28. This is known as your front-end ratio.
- When you divide the sum of your total monthly housing costs and total monthly debt payments by your total monthly income, the quotient shouldn’t exceed 0.36. This is known as your back-end ratio.
When a bank grants your business a loan, they want to feel confident that you’ll repay it. Makes sense, right? Their chief means for securing a loan is by asking for collateral, i.e. property or an asset that a lender may seize should a borrower default on his or her loan payments. I know this sounds scary, but banks simply want to minimize the risks of extending credit to your business. And if you want a bank to trust you, it helps to have assets (or a guarantor) to back your application.
A final word of advice.
Remember, your first loan is often the most difficult to secure. Once you’ve proven yourself worthy of one lending institution, your likelihood of qualifying for future loans will greatly improve. So take heart, and keep applying!