5 steps to improve your chance at getting a small business loan

For eCommerce businesses, the costs to startup may be small compared to a brick-and-mortar ventures. But the costs to achieve real growth can hinder them just the same.

Funding new initiatives—a site redesign, an expansive digital marketing campaign, a bulk order on inventory—is difficult without outside capital. And to achieve that capital, most businesses (particularly small eCommerce firms) won’t get venture capital funding. They’ll need to use debt financing instead.

Debt financing (usually in the form of a business loan, line of credit, or other financing that requires paying back the principal plus interest) is a risk, but it’s also how business owners maintain full control of their business while accessing funds that wouldn’t be available to them otherwise.

These days, eCommerce business owners may choose from a variety of loan options. Not all of these funding options will sound good to you—especially if you’re a new business, or if you’ve struggled with credit in the past.

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Whether you’ve already applied for a small business loan and come away disappointed with the offers, or you’re gearing up to apply with either your local bank or an online lender, there are some important steps you can take to improve your chances of getting a quality, low-interest business loan offer and moving ahead with your plans.

Consider taking some or all of the following five steps:

1. Build your business credit

Just as you have a personal credit score (more on that below), you have a business credit score that reflects the creditworthiness of your business history.

Your business credit score—which typically ranges from 1-100—is financial shorthand for whether lenders or vendors should feel comfortable extending you credit, as well as for how much and on what terms.

Generally speaking, many of the main factors that determine your score are universal. Knowing what they are is the first step in knowing how to work on them or otherwise improve their standing in the eyes of credit bureaus.

In order to build up your business credit, focus on the following tactics:

Dispute errors and inquiries

Get into the habit of checking your business credit report regularly. Credit bureaus are far from perfect, and sometimes they will report charges, pulls, or other dings to your record that aren’t accurate.

If you see an inaccuracy in your report, don’t wait for the record to correct itself: Contact the bureau and dispute it. Even a few points off your score can affect your application. 

Decrease your credit utilization ratio

Your credit utilization ratio is the amount of credit available to you compared to how much of that credit you’ve used. If you have a business credit card and a line of credit, and both of them are maxed out, that tells lenders that you already have a fair amount of outstanding debt to pay back.

Pay off your credit balances and keep them as low as possible, particularly ahead of a loan application.

Pay your bills on time

It’s crucially important to pay all of your bills and debts on time. Whether it’s your utility company or a vendor, falling behind on your payments can negatively impact your score.

Form responsible credit habits

If you haven’t been paying much attention to your business credit score, or carry a low score because of a prior venture gone bad, it’s time to start building up a positive credit history. Obtain a good business credit card and start using it while making regular repayments. Even this simple process can help rebuild your score over time while instilling positive spending habits.

Add trade references to your credit report

If you have a good relationship with a vendor or supplier, see if you can create a credit account with them. Assuming you make consistent on-time payments on that account, you can add them manually as a “trade reference” to your credit report (assuming they don’t already share payment data with a credit reporting agency). These references demonstrate your fiscal responsibility and history with vendors or providers like wholesalers and attorneys.

2. Improve your personal credit score

It’s true: Lenders want to make sure that you’re just as responsible a spender in your personal life as you are in business.

Remember, your personal credit score ranges from 300 to 850, with 850 being a “perfect score.” Here’s a general breakdown of credit score tiers:

  • Exceptional: 800-850
  • Very Good: 740-799
  • Good: 670-739
  • Fair: 580-669
  • Bad: 300-579

You won’t even be considered for certain loan products if your score is below the “good” tier, and you’ll be more likely to get a low interest rate if your score is in the “very good” to “exceptional” range.

So, how do you bump up your personal credit in advance of a small business loan application? Many of the same guidelines that apply to business credit apply to your personal credit practices. That means you should pay your bills on time, reduce your credit utilization, dispute errors on your report, and so on. You’ll also want a diverse “credit mix” of different products, such as a credit card and a personal or student loan.

3. Wait it out: Increase your “time in business”

This factor plays a role in improving your business score, but it’s important enough that it deserves special consideration.

Quite simply, your business is going to need to be around for awhile before lenders consider you for a good small business loan. For example, though there is no “official” time in business qualification for an SBA loan—considered the gold standard of small business loans—you’ll need to be in business for at least two years to be considered.  

Your business staying solvent and profitable for several years shows lenders that your business model is working and you’re a good bet to stick around for the long haul. And unfortunately, nothing can prove your longevity like longevity itself.

Of course, if your funding need is pressing, this isn’t an option. But if you’re looking for a small business loan for a project that isn’t imminent, you’re better off waiting and improving your time in business in order to get the best loan offer possible.

4. Boost your revenue and cash flow

This step, of course, is easier said than done. But your annual revenue and monthly cash flow will both likely be reviewed by lenders, which means you’ll strengthen your case by making more money.

Some of the best loans on the market, such as SBA loans or high-quality business lines of credit, will look for businesses that produce at least $100,000 in annual revenue. Other affordable loan products require at least $50,000 in annual revenue.

Start thinking about what steps you can take to boost your revenue over the next six-12 months. Will a new marketing campaign help boost sales? Can you add a new product or service to your line to pull in new, related business?

Additionally, improving your monthly cash flow is also an important step. Find ways to get paid faster by clients and customers, such as tightening your net payment windows, or manage your expenses by reducing spending on inventory in slow months.

5. Gather and prepare important documents

Most business loan applications will require you to submit certain documents, such as bank statements, tax returns, proof of ownership, and a driver’s license.

For the best small business loans, however, you’ll likely have to go a bit further. SBA loans require that you submit a business plan, business debt schedule, profit and loss statement, and balance sheet as well.

Writing up a business plan ahead of funding is good practice whether or not it’s technically required by a lender. By creating a business plan, you’ll outline your business objectives and goals, get a handle on current finances and future projections, and create a more persuasive case for investment or lending.

Take the time to gather up all the important information, documents, and forms you need ahead of your loan application. Otherwise, you’ll have a lot of back and forth with your lender that can drag on for weeks or months. The faster you go through the process—and receive your outcome, good or bad—the sooner you’ll know what your options are, and whether you’ll need to make improvements.  

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Taking on a small business loan to finance your new eCommerce projects or initiatives is always a risk. By strengthening your case for a quality loan, however, you reduce that risk and improve your chances for success over the long run. Follow these steps and you’ll soon see better options from lenders.

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Eric Goldschein is a staff writer at Fundera, a marketplace for small business financial solutions such as business loans. He covers entrepreneurship, small business trends, finance, and marketing.