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Previously: Strengthening Your Business Plan
Lenders don’t just look at numbers. They also look at people. When you're applying for a small business loan, your personal and professional credibility can carry just as much weight as your balance sheet.
This post focuses on how to establish and enhance your creditworthiness, as well as outlining different loan structures that may improve your chances of a loan approval.
Lenders typically start by looking at your credit profile, which serves as a financial track record of your ability to manage debt. If your personal credit score is low or inconsistent, improving it should be one of your first priorities.
Paying your bills on time, keeping your credit card balances low and reviewing your credit reports for errors are all essential habits. Over time, creating good habits like these can significantly raise your score and show lenders that you’re financially responsible.
If your business has been operating for a while, it may also have a credit score. Establishing business credit can begin with opening a business credit card, working with vendors that report payment activity to credit bureaus and making payments on time. Keeping business and personal finances separate is also key, as it reinforces the legitimacy and professionalism of your business in the eyes of a lender.
Although rebuilding or establishing credit takes time, it’s one of the most impactful steps you can take to improve your loan eligibility.
Beyond credit scores, lenders want to see that your business is steady and sustainable. Even if you’ve only been in business for a short time, consistency in operations and revenue can make a meaningful impression. If you can show year-over-year growth, loyal customers and even a few long-term contracts, you’re telling lenders your business is dependable.
Keep organized records of sales trends, customer metrics and operational improvements. The more you can quantify your business’s stability, the stronger your loan application becomes.
Understanding Loan Structures, Guarantees, and Collateral
Depending on what a lender sees in your application, you may be asked to consider different loan structures or commitments to help reduce the loan’s risk.
Borrower/Co-Borrower Structures
In this scenario, two or more individuals apply for a loan together and share equal responsibility for repayment. This can improve your chances of approval, especially if your co-borrower has strong credit or financials.
The downside: If the loan defaults, it will negatively affect both borrowers’ credit scores.
You may be asked to personally guarantee the loan, even if it's for your business. A guarantor agrees to repay the loan if the business fails to do so. Sometimes, a third party (like a business partner or investor) can serve in the role of guarantor.
The downside: If the business defaults, and the guarantor also fails to pay, it will impact the guarantor’s personal credit and financial standing.
Offering collateral gives lenders additional security. A few types of acceptable collateral may include:
For additional resources on ways to improve your credit score and understanding different loan structures, reach out to The Iowa Center.
Each lender will have specific guidelines, including ensuring the asset is free of any liens. Collateral can significantly strengthen your loan application, especially if your financials are in question.
Next up: Exploring Alternative Funding Options