How to develop a strong credit application
Know what details go into a strong credit application and how you can prepare.
If you're currently seeking credit for your business, you're not alone. In 2017, 87% of small businesses applied for a loan or line of credit.1 To give yourself a better chance of getting approved for financing, it's important to develop a strong credit application. Here are four things to consider when preparing your application:
1. Credit purpose
When you apply for credit, the financial institution will want to know how you plan to use the money you borrow. Whether it's for equipment or inventory, you should have a clear understanding of why you need credit. In addition, make sure your credit request is practical. If you ask for more money than your business can realistically repay, the lender may deny your loan request or make a counter offer for a lower amount.
2. Credit history
Before making a credit decision, the lender will pull reports to review your personal and business credit history to find out if you have a history of making timely payments to your creditors and how much debt you have. Recent credit inquiries and interest-only mortgages may also affect a lender's credit decision. This information will help lenders determine whether you are a responsible borrower. If you have a weaker personal or business credit report, take steps to improve it. For example, you may want to accelerate paying down your existing credit or set up automatic payments to reduce your risk of late payments.
3. Company finances
Your company's cash flow also plays a key role in your ability to get approved for credit. Lenders will look at how much revenue your business generates to ensure you can repay any additional debt. A lender may also request collateral – that could come in many forms such as business equipment or real estate. Make sure your company's financial data is accurate before submitting your credit application.
4. Application and accurate documentation
Your application should be complete and free of errors. Check to make sure the following information is accurate before you submit it:
Date your business was established: Provide the date your company was originally established instead of the date the entity changed ownership or entity type.
Yearly business sales: Include the gross sales listed on your business's prior tax return.
Yearly income: State your business's full annual earnings.
Business name and address: Make sure the business name and address you list on the application are represented on your articles of incorporation.
Ownership: Include accurate ownership information for your business.
If you have a better understanding of what lenders look for in a credit application, you may improve your chances of getting approved.
1 "2017 Small Business Credit Survey." Federal Reserve Banks of Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, Philadelphia, Richmond, St. Louis, San Francisco https://www.fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/2018/sbcs-employer-firms-report.pdf