There are several reasons that small businesses approach banks and other lenders for lines of credit. However, despite the multitude of reasons, conventional lenders still only approve between 20 and 50% of those businesses that apply, and that may be due to the business owners’ level of preparation. Therefore, to improve your odds of getting approved for a business line of credit, you should be prepared in several critical areas.
Know the Difference Between a Lender and a Factoring Company
One of the first things to know and understand is the difference between a conventional lender and a factoring company. A traditional lender offers fair rates and generous term lengths. A factoring company, alternatively, may offer fair-sounding monthly payment but with an annual interest rate of around 300%. While these businesses may sound enticing, especially for business owners who lack a decent credit score, beware of the interests.
Find a Small Business-Friendly Lender
Also, while most conventional lenders will offer lines of credit to qualified businesses, not all of these lenders are small business-friendly, meaning that they have loan programs designed to cater to larger corporations. Therefore, you may want to find banks and traditional lenders who offer SBA loan programs. The best way to research your options is to reach out to other small businesses in your area to get referrals.
Know Your Paperwork and Have it in Order
There is likely nothing that frustrates a potential lender more than a client coming in without the proper documents. Always do your research before meeting with a lender for a possible loan. Many lenders post their loan requirements online, while others are more than happy to explain their expectations over the phone. However, most traditional financial institutions will require similar documents.
- Business license
- Business bank statements for at least six months
- Year-to-date financials
- Personal and business tax returns
Be Prepared for Less
While many business owners apply for lines of credit expecting a certain approval amount, they will likely end up with less than expected, especially if they have never applied for credit before. Therefore, it is essential to set your expectations low. However, if you are consistent and on-time with your payment, then the next time you apply, you may be approved for more.
Establish and Maintain a Good Credit Score
While it likely goes without saying, a good credit score is your best friend in the loan approval process. Therefore, do your best to establish and maintain a good credit rating, especially when you own a business.
Lines of credit are useful financing options. However, they are not always that easy to get approved for. Therefore, focus on the things you can control to improve your overall odds.