October 08, 2021

How to Qualify for an Installment Loan as a Business Owner

An installment loan can be a great way to cover your business expenses. With this business financing option, you receive a lump sum of money upfront. Then, you repay the amount that you borrow plus interest and fees over an agreed upon term, which can range from a few months to several years or even longer. If you know exactly how much money you need to pay for commercial property, hiring and training new employees, payroll, equipment, inventory, or any other business expense, an installment loan makes sense. In this blog post, we'll thoroughly explain how to apply and qualify for an installment loan as a small business owner.

Common Requirements That Business Owners Need to Meet for Installment Loans:

Fortunately, there are countless business lenders who offer installment loans. While some have very rigorous requirements, others are more lenient. In most cases, however, business loan lenders require the following from business owners who would like to take out an installment business loan.

1. Time in Business

Most working capital lenders consider small businesses who have been around for at least one or two years. If you own a startup or newer business, don’t worry; some lenders may still be willing to present you with a loan offer. However, they may ask you to provide recommendations or extra documentation to prove that you will be a reliable borrower.

2. Credit History

Your business and personal credit scores show business lenders how risky you are of a borrower. A higher credit score indicates that you’re responsible with your money and have a good handle on your business finances. In comparison, if you have a poor credit score, you may have outstanding loan or credit card debt. If you find that your credit score isn’t in the best shape, it may make sense to improve it before you apply for an installment loan.

3. Business Plan

A business plan is essentially a blueprint for your small business. It shows lenders what you hope to accomplish with the funds that they may lend to you. Your business plan should be well-organized and include a variety of components, such as:
  • An executive summary
  • SWOT analysis
  • Marketing strategy
  • Upcoming financial projects
  • Projected use of loan funds

4. Financial Statements

Lenders want to see that your business is thriving or at least breaking even. Therefore, they’ll often ask you for a number of financial statements, including:
  • Balance sheets
  • Income statements
  • Profit and loss statements
It’s a good idea to work with an accountant or other financial professional to make sure your financial statements are accurate and up-to-date.

5. Collateral

Depending on the installment loan you apply for, you may be required to submit collateral in order to qualify. Collateral is an asset like your commercial vehicle or equipment that you use to secure your loan. If you default, the lender will repossess your collateral. If you choose a secured installment loan, figure out the value of your collateral. New call-to-action

How to Increase Your Chances of Loan Approval

While you may not have control over how long you’ve been in business, you do have control over other requirements and can increase your likelihood of getting approved for an installment loan. By following these tips, you’ll position yourself as an attractive borrower and find it easier to convince a business lender to approve you for financing.

1. Improve Your Credit Score

As a rule of thumb, most lenders like to see a minimum credit score in the 600s. If your credit score is on the lower side, you should improve it before you apply. To do so, pay your bills on time, reduce your credit utilization ratio, establish credit accounts with suppliers, and dispute any errors or inaccuracies you find.

2. Finalize Your Business Plan

If you don’t have a business plan, you should write one or hire someone to do it for you prior to applying for a business loan. In the event you already have a business plan, it’s time to perfect it. Go through your business plan word by word to make sure it’s accurate, flows well, and is free of spelling and grammar issues. Ask a professional copywriter or editor or someone else with a fresh set of eyes who is unrelated to your business to review it.

3. Measure Free Cash Flow

Free cash flow refers to the amount of cash your business has at the end of a given period that is not required to operate it. Since you’ll need money to repay your installment loan, make sure you have enough free cash flow to pay back the amount you borrow.

4. Weigh Your Financing Options and Select an Offer

To ensure you select the best installment loan for your business, it’s in your best interest to compare available loan options. Learn about what types of lenders out there and which loans are ideal for your unique business. Although you may be in a rush to secure funding, you won't regret taking time to fully understand your potential loan offers. Once you apply for a loan and receive an offer, be sure to thoroughly read the terms and conditions. Your loan offer should include the following information:
  • Loan Terms: Your business loan offer should explain what your loan repayment terms are.
  • Interest Rate And Other Fees: Before you sign on the dotted line, make sure you understand the complete cost of your loan. In addition to the amount that you're borrowing, you may also be charged an interest rate and other fees.
  • Funding Timeline: In some cases, once you're approved for financing, the loan amount will be in your bank account within the next business day. However, the timeline will vary by lender. If you need funding immediately, be sure that the funding timeline meets your expectations.
  • Prepayment Discounts or Penalties: Depending on the lender, you may receive a discount if you pay off your loan early. However, other lenders penalize borrowers for paying off their loan prior to the term end date, so it's crucial that you understand your lender's prepayment rules.

Conclusion: Steer Your Business Toward Success with an Installment Loan

You can use an installment business loan to pay for day-to-day, occasional, or unexpected business expenses. Installment loan options usually come with flexible repayment terms and fast approvals so you’re bound to find one that meets your particular needs. If you’re unsure of how much cash you need to meet your business goals, consider a business line of credit instead. It’s a bit more flexible because you can borrow as much or as little money as you need up to a set credit limit.