Small and medium-sized businesses are the backbone of the American economy. They create jobs, drive innovation and support local communities. According to the 2021 Small Business Profile, small businesses make up 99.9% of all U.S. businesses and employ 46.8% of the total workforce.
Yet many small businesses struggle to obtain business loans from traditional lenders. Banks are becoming more conservative in their lending practices, and as interest rates rise and the economy slows, it becomes increasingly difficult to secure favorable loan terms.
However, with the proven strategies outlined in this article, small businesses can make themselves more attractive to lenders and improve their chances of securing business financing.
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5 Strategies for Getting a Small Business Loan
To be realistic:
Lenders look for companies with a clear understanding of their financial situation. These companies have a realistic idea of how much money they need to sustain their growth. When applying for a loan, it is advisable to include a detailed plan of how the funds will be used and to ensure that the amount requested is justified. It also helps answer the following questions:
- What are the short and long term goals of the business?
- What are the company’s current financial statements?
- What is the profitability history of the company?
- Why does the business need the loan?
- What is the repayment plan?
Use the “Insurance as capital” financing strategy:
Businesses that already have some traction (but can still generate revenue) can make themselves more attractive to lenders with an insurance strategy that helps de-risk their business model. Some experts call it “insurance as capital”.
This financing strategy involves obtaining a specific type of insurance policy called Performance Guarantee Insurance. Under this policy, the insurance company insures the financial performance of a business up to a certain amount. Nemo Perera running Edge managementa company that specializes in helping clients use the strategy, says: “by leveraging an insurance company’s balance sheet through a meaningful (political) risk transfer mechanism, which alleviates investors’ most pressing concerns. We are able to improve the solvency of the entity with the balance sheet of a billion dollar insurance company.
An important advantage of this financing strategy is that it helps companies obtain loans on more favorable terms. Lenders become favorable because they are protected against the risk of default, which allows them to offer better terms to the borrower. Companies in high-risk sectors like greentech, ESG and cleantech can benefit from this policy.
Companies interested in using this financing strategy should contact an insurance broker specializing in performance guarantee insurance.
Get an SBA-backed loan:
the Small Business Administration (SBA) is a government agency that helps small businesses. One of the many ways they do this is by securing loans made by traditional lenders. When a lender considers a business too risky for a loan, the SBA can step in and guarantee a portion of the loan.
Getting an SBA-backed loan can be beneficial because it reduces risk for the lender, which often results in more favorable loan terms for the borrower. After applying for a business loan from a participating lender, the SBA reviews the application and determines whether it will provide collateral.
Interested businesses must meet certain requirements and use loan proceeds for specific purposes such as working capital, inventory, or the purchase of equipment.
Use a well-prepared business plan:
It is essential to have a well-prepared business plan when applying for a business loan. This document should outline the company’s goals, finances, and repayment plan. It should be clear, concise and provide enough detail for the lender to have a good understanding of the business.
Also include information on the target market, sales and marketing strategy, competitive landscape, and management team. This information will help lenders understand that there is a well thought out plan to grow the business.
Apply with a good credit history:
Lenders consider the company’s credit history when making a lending decision. They will want to see that the company has a good track record of paying off debts on time.
Businesses can develop a good credit history by paying all bills on time and maintaining an excellent credit-to-debt ratio. Experts also advise against using too much available credit, as it can hurt credit rating.
Despite the immense contributions of small and medium-sized businesses to the US economy, they often face significant challenges obtaining loans. Fortunately, there are several strategies business owners can use to increase their chances of being approved for a loan.
By being realistic about business goals and prospects, using a performance guarantee insurance policy, and having a well-prepared business plan, small business owners can make their business more attractive to lenders. , thus improving their chances of obtaining commercial financing.