Interestingly, existing businesses also seem to find it hard to obtain capital even though they already have a proof of concept with their businesses. In fact, the importance of expansion capital
for an existing business cannot be overemphasised. Your business is likely to be stuck if you can't access expansion capital. This article offers three insights into some of the things you can do to improve your chances of obtaining small business loans. Think like a lender
Many small businesses often encounter failure and frustration in their search for small business loans because they are stuck with a borrower's mentality. In order to increase your chances of obtaining financing for your business, you need to think like the lender. It doesn’t matter if the lender is a government agency, bank, peer-to-peer lender, another business, or even a loan shark.
A lender wants to see a potential borrower who has an objective understanding of their financial situation. Lenders love to see a loan application backed by reasonable collateral that shows you have faith in your business idea. A lender wants to see that you have put serious thought into how much you really need (not how much you want). You'll so need to display a comprehensive understanding of your cash flow and credit quality – you don't necessarily need to have excellent credit
but you must be clear about your creditworthiness.
Thinking like a lender puts you miles ahead of other loan applicants but if you approach the loan with the borrower's mentality, your application will reek of unpreparedness and desperation and you are not likely to be successful in your loan search.Determine how much you need
Before you apply for a small business loan, you'll need to make a firm resolve on how much your business need. The amount of money you need is different from the amount of money you want – lenders know this but many business owners often fail to make a distinction between how much they need and how much they want. Most small business owner will love to get tidy $10M (or more) for expansion but the lenders will not take you seriously if you approach a loan application like a largesse from Santa Claus.
A simple key for unlocking how much of a loan you need is to calculate your debt service coverage ratio
(DSCR). Your debt service coverage ratio shows how much cash you have to service your debts without killing the business or defaulting on the loans. The DSCR is calculated by dividing your monthly cash flow by the monthly loan payment plan. Your cash flow is your sales expenditures. Many lenders will want to see a DSCR of at least 1.5 or more. You should calculate the DSCR to be sure that it is more than 1.5 before you submit your loan application. Poor credit shouldn’t stop you from getting loans
It is a well-known fact that lenders love potential borrowers who have excellent credit score/ratings. However, some business owners end up with less than impressive credit due to a number of factors that might sometime be beyond their control. Unfortunately, some business owners with poor credit they usually don't bother looking for credit facilities because of the general belief that nobody will lend you money if your credit is less than stellar.
However, refusing to look for business loans
because you have poor credit is the same as refusing to take a birth because you feel you are too dirty – it doesn’t make any sense. If you run a B2B firm, you might be able to receive loans (not necessarily money) in terms of raw materials, finished goods, or services from other vendors in the industry.
More so, if you have receivables from other businesses, you can use your receivables as collateral to secure loans from traditional financial institutions. You should also consider working with Small Business Administration (SBA) lenders
. The loan officers are often willing to examine individual applications and find a way to help you if you state your case accurately.