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Applying for a small business loan can be a daunting and discouraging process — which, given the statistics on approval rates, is understandable.
According to the Small Business Credit Survey by the Federal Reserve, 47 percent of U.S. small businesses applied for financing in 2015. And of that 47 percent, 18 percent received only half of what they applied for and another 18 percent received no money at all.
While those numbers aren’t great, there are things you can do to potentially improve your odds of getting a small business loan from traditional financing sources. Below, we walk you through what you might need to button up before you begin the small business loan application process. (As an alternative, Square Capital* offers access to small business financing that doesn’t require a lengthy, complicated application process).
Here’s how to get a small business loan.
1. Gather and organize all your business documents
Regardless of the type of loan you’re looking for, there are a number of documents you should have in place before applying for a traditional loan from a small business lender. (Loans through Square Capital, on the other hand, require no lengthy application.)
Here are the documents you should have at the ready (note that lenders may vary in the materials requested):
Written business plan
- Profit and loss statements and projections
- Business and personal credit scores
- Tax return documents
- Bank statements
- Copies of relevant legal documents including articles of incorporation, contracts, leases, and any licenses and permits needed to operate
Even if you’re not in the market for an SBA loan, you can check the Small Business Administration’s site for a full small business loan checklist. (You can also read our tips for how to get noticed by Square Capital, Square’s small business financing program, or check here to see if your business is already eligible.)
2. Know how you’re going to use the money
Just saying “I need money to grow my business,” is probably not going to cut it. Before you decide to go for small business financing, make sure you know exactly what you’re going to use it for.
A specific idea about where you’re going to put your funds to work — and how that use will help your business grow in the long and short term — is something small business lenders want to see. Getting clarity here will also help you analyze factors like interest rates and loan terms, so you can land on the right loan for your business.
3. Create a rock-solid business plan and register your business name
Many lenders want to see that you’ve thought carefully about your growth and operations strategy. That’s why a rock-solid business plan is such a crucial document in the small-business financing process. Lenders may look to your business plan to help them determine whether or not you’ll soon be in a position to pay them back.
You also want to make sure that you’ve registered your business name properly. You can’t get a small business loan without registering your business.
While qualifying for a loan through Square Capital doesn’t require a business plan, having one in place is a smart idea for any small business, especially when you’re just getting things off the ground.
Read more about how to create a business plan.
4. Make sure you have good credit
Bad credit makes it harder to get a small business loan. Square looks at whether or not you’re a healthy, growing business as part of the approval process. But to many lenders, your credit score is a top factor in their decision on whether to accept or deny your loan application.
Generally, banks may look at both personal and business credit scores — so make sure that in both arenas, you’re making payments on time, spending well under your credit limit, and keeping accounts open. Also, if you have no credit history, that could prove problematic for some lenders.
5. Have a handle on your cash flow
Cash flow issues are a top pain point for small businesses, especially those with large, upfront operational costs and equipment. But if you’re applying for a small business loan, you want to make sure you’re consistently staying above water with your cash flow.
This is especially important in light of your debt-service coverage ratio (DSCR), something many lenders look at when deciding whether or not to approve your application. Essentially, a DSCR is the ratio of cash a business has readily available for servicing its debt. It’s a mathematical equation that lets lenders know whether or not your business will be able to pay them back (which is, of course, the top-of-mind question).
If your business is having trouble with cash flow, check out our recent post “Trouble Managing Cash Flow? Some Strategies to Stay in the Green.”
About Square Loans
Getting a small-business loan can be a complicated process — but it doesn’t have to be. With Square Loans, there’s no lengthy application, qualified sellers can get funds as soon as the next business day upon approval, repayment happens as a fixed percentage of your daily card sales, and the cost of the loan is a fixed dollar amount that never changes.
We want to make getting access to the funds you need to grow your business as simple and easy as possible.
Square Loans, LLC and Square Financial Services, Inc. are both wholly owned subsidiaries of Square, Inc. Square Loans, LLC d/b/a Square Loans of California, LLC in FL, GA, MT, and NY. All loans are issued by either Celtic Bank or Square Financial Services, Inc. Square Financial Services, Inc. and Celtic Bank are both Utah-Chartered Industrial Banks. Members FDIC, located in Salt Lake City, UT. The bank issuing your loan will be identified in your loan agreement. The individual authorized to act on behalf of the business must be a U.S. citizen or permanent resident and at least 18 years old. Loan eligibility is not guaranteed. All loans are subject to approval.