If you need a cash injection for your new small business and are thinking of applying for a startup loan, there are several things you’ll need to do to improve your chances of success.

From finding the right loan for your business and checking your eligibility, to establishing how much you need to borrow and organizing your documentation, we go through the essential steps you should follow.

1.Think about the type of loan you need

The first thing to deliberate is which kind of loan is best suited to your business. There are lots of options to choose from, so take time to do your research and weigh up the pros and cons of each product.

For example, if you need to invest in equipment or machinery, you may lean towards equipment financing. This allows you to buy the tools your business needs and slowly repay the loan over a fixed period. Some companies opt for a business line of credit which you can draw from as and when you need, where others use commercial real estate loans to invest in warehouses, offices, land and more.

2. Check your eligibility for a loan

The next step is to check your eligibility for a startup business loan. Every lender has its own criteria so you’ll need to ensure that you meet their requirements to avoid a potential refusal, which can have a negative impact on your credit score.

When it comes to bank small business loans, most lenders tend to look at things like your:

• Credit score: If you have started to build business credit, then the lender will take this into account when reviewing your application. However, if you do not have any business credit, your personal credit history will be used instead.
• Current debt obligations: Another key factor lenders will consider is how much debt you currently owe, which will give them a better idea of your affordability. If they need more details, your business debt service coverage (net profit divided by your annual debt) may also be reviewed.
• Annual revenue: The amount of projected or actual revenue you will need to demonstrate will vary depending on the lender. It will also be influenced by the amount of funds you want to borrow.

Some lenders may ask for a personal guarantee that will protect them if you default on the loan. Your business may also need to be in business for a minimum period.

3.. Decide how much money you need to borrow

If you have good credit and can borrow a large sum of money, make sure you have put together a budget to assess your monthly repayments. The key thing here is to only borrow what you need and can afford – otherwise you could find yourself in a situation where you are struggling to repay the loan, which can have a knock-on effect for your business.

Forecast your expenditure by projecting your monthly income and expenses. When it comes to your expenditure, some will be fixed costs while others may fluctuate, so it’s usually a good idea to overestimate your outgoings. Try to be as realistic as you can with your income projections, as it can take some time for startups to hit the targets they need.

4. Gather the documents needed for your application

Once you know what type of loan you want to apply for, have checked your eligibility and decided how much you want to borrow, you’ll find it helpful to gather the documents you’ll need.

Most lenders will ask for:

• Personal and financial information: Name, address, D.O.B., Social Security number and 12 months of personal bank statements.
• Business information: This will include things like your Articles of Incorporation, Employer Identification Number and any relevant business permits and licenses.
• Financial documents: Personal and business tax returns, cash flow statement, projected balance sheets and schedule of business debts.
• Business plan: You will likely have one of these already, which should include a company description, executive summary, market research and your funding request.

The more organized you can be before you start your application, the more efficient the process should be, helping you to avoid any unnecessary delays.

5. Consider your options if your application is refused  

There are no guarantees that your application will be approved, even if you have good credit. If you are refused by a lender, get in touch with them to find out why to see if there is anything you can do to improve your chances.

Be careful not to apply for a loan too many times in a short period, as this can be seen as a red flag by lenders, who may believe you are desperate for funds. It can also have a negative impact on your credit rating, making it more difficult to get finance in the future.

Business loans are not for everyone, so you may want to consider:

• Crowdfunding – The likes of Kickstarter or Indiegogo allow you to raise funds online, connecting you directly with potential investors.
• Business credit card – This is another form of credit, so it will depend on your rating and ability to repay any debts incurred.
• Use your own money – If you have personal savings you can use for your business, you may want to consider using it to support your venture.
• Apply for a personal loan – You can use a personal loan for any legal purpose – although you will be personally responsible for the debt.

And if your credit rating is not strong enough, look at ways to improve it so you can potentially reapply later.

Final thoughts

Securing the funding you need for your startup business can be a challenge. But provided you compare, research and prepare your application in the right way, you have a better chance of being approved. Find a lender that suits your needs, settle on a loan that is affordable and ensure that you are eligible. There are other funding options if you don’t qualify for a small business loan, so you may want to consider these as an alternative.