best practices for getting an affordable business loan

Many business owners, at one point or another, realize that they need some extra funding to make ends meet. 

They might need help financing a renovation of their storefront, or a cash flow cushion while they wait for a client to pay their invoice. The business isn’t failing, or in trouble—they just need a boost to help keep things moving.  

Whatever the need, a business loan can be a useful financial tool in these situations. The cost of the loan is the cost of doing business—and in many situations, the gains made as a result of the loan (an expanded storefront, a bulk deal on inventory, a new point of sale system) are worth the interest payments and fees. 

If you find yourself in this situation, it’s your responsibility to find the most affordable business loan option possible for your business. If you haven’t been smart with your business credit card, or have missed a few payments to suppliers in the past, applying for a loan now will likely result in offers with high interest rates, short repayment terms, and other stipulations that can hamstring your business. 

Start following these six practices when gearing up to apply for a loan, and your chances of qualifying for an elite option will be much higher. 

1. Give Yourself a Long Runway Before Applying

Need a business loan today to cover this week’s costs? Operating from a “last minute” position is a sure way to get saddled with a short-term loan with a high interest rate. 

If you think you may need a business loan soon, start exploring loan options now. The application, underwriting, and funding process for SBA loans and bank loans can take weeks or even months. One of the upsides of using an online lender is that the turnaround time can be as little as a day—but you’ll pay for that luxury. If you can, give yourself time to apply for better options that take more time. It’ll be worth it in the long run. 

2. Use Your Business Credit Card Responsibly

One of the best tools a business has at their disposal is a business credit card. When starting your venture, a business credit card helps separate your business and personal finances, but additional perks and benefits of using one abound. You can reinvest the rewards points you rack up, take advantage of purchase protections, and track your spending more easily.

Using a business credit card also helps you develop and improve your business credit score, which tells lenders how creditworthy your business has been over the course of its existence. Making late payments on your credit card bills or maxing out your available credit can hurt your score and make lenders wary about lending to you at low rates. 

3. Open up Additional Lines of Credit

Another way to boost your business credit score is to improve your credit utilization rate or ratio. This ratio is your outstanding credit balance relative to the total credit available to you. 

For example, if you have one credit card with a $10,000 limit, and you’ve put $9,000 on it this month, your credit utilization ratio is 90%. Any ratio over 30% is worrisome to lenders

There are a few ways to reduce your credit utilization ratio. One is to spend less money on credit—though that’s not always an option, and it reduces your ability to rack up rewards points. Another is to give yourself access to more credit. 

To do this, you can apply for another business credit card, or qualify for a business line of credit. A business “LOC” is similar to a credit card—a pool of funds that you can typically draw from over and over as needed, paying off each draw separately. 

LOCs are a sought-after form of business financing because of their flexibility: If you obtain one, you can keep it unused in your back pocket and not pay a cent for it. Then if a need arises, you already have access to funding without needing to apply for a loan. Plus, it improves your credit utilization ratio—a win-win scenario.  

4. Improve Your Personal Credit Score

When lenders consider your application for a business loan, they don’t stop at reviewing your business finances. They will also scrutinize your personal credit history. 

Many of the same practices that go into building a strong business credit score—paying your bills on time, having different types of credit, having a long and detailed credit history—are the same for your personal credit score. Therefore, if you’ve struggled with personal spending in the past, it’s time to right the ship and get your finances back on track.  

5. Use Accounting Software to Build Crucial Reports

Most conscientious business owners will always have one eye on their accounting reports, because these reports give you insight into the financial health of your business. If, for any reason, you don’t do this already, it’s time to start. 

Quality accounting software makes it easy for you to track spending, debt, cash flow, revenue, profit, and other important financial data. Having access to your most important financial reports is a good business practice, regardless of whether you are applying for a loan. 

Another benefit to being able to quickly produce these reports is that lenders will want to take a look at them. Many small business lenders will want to see annual business revenue and profit, balance sheets, and A/R and A/P aging reports—along with other important financial information like business and personal tax returns and disclosures of other debt.  

Having these documents ready when you apply will speed up the process and allow you to move forward or move on without delay. 

6. Consider Securing Your Loan With Collateral

Some business owners are averse to putting their assets up as collateral when applying for a loan. If, for some reason, you’re unable to repay your loan, the lender can seize that collateral and you’ll lose a valuable piece of your business or personal property. 

If you’re confident in your ability to repay your loan, however, “securing” it with collateral can make your loan terms more affordable. In some cases, such as with some SBA loans, collateral is required. 

An unsecured loan, on the other hand, will have a higher interest rate—as a way for the lender to mitigate the risk of lending to you without collateral as repayment fallback. And even then, you’ll still likely have to sign a personal guarantee or agree to a UCC lien on your business, allowing lenders to go after your assets if you default. In a sense, even “unsecured” loans are secured—you just have less control over what the lender can seize if things go south.  

A Note of Caution:

Taking out a business loan is always a risk, and should never be the first step you take when trying to cover a cost or finance a project. If you crunch the numbers, however, and find that this debt can pay for itself, it can be a risk worth taking.

The drawbacks of this risk are fewer with every dollar you save on interest payments, so start following the above practices now—and when it’s time for you to get that business loan, you’ll have options to choose from. 

photo of Eric Goldschein

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.