5 Ways You Can Improve Your Odds of Getting a Small Business Loan
Starting and growing a business can be an exciting adventure. Whether you are ready to take your cottage industry to the next level or need capital to launch a new idea, you are likely to need cash to get you where you need to be.
Unfortunately, startup business loans can be tricky to come by if you don’t know what you’re doing.
A 2015 survey by the Federal Reserve showed that nearly half of U.S. small businesses applied for funding in 2015. Of those applicants, 18% received half of what they requested, and another 18% received nothing.
If you go about this the right way, though, you can get a startup business loan (and avoid borrowing from your parents, cashing in your entire 401(k), or aborting your dreams).
Lenders look askance at those looking for a startup business loan. Preparation is one of the key ingredients to getting the loan. Here are the 5 things you can do to improve your chances of getting a loan.
Getting a startup business loan means getting your personal credit in order
One of the first things a potential lender will look at is your FICO score. If your personal credit history is in shambles, now is the time to start cleaning it up.
If time permits, you can cultivate a higher score by paying down debt (especially credit cards) with timely payments. You may need to contact creditors on the report who you need to make additional payments.
Consider hiring assistance if there are serious errors on the reports that need to be cleared up. But be wary of “credit repair companies” that ask for large sums of money. Remember that rebuilding your credit is something you can probably handle on your own.
If your business plan does not allow enough time to clean up bad credit, then you will need to be prepared to acknowledge past mistakes and what you have since done to correct them.
Gather personal records
This next recommendation may seem like a no-brainer, but organization is a critical step that many people overlook. Something as simple as having all pertinent documents in a portfolio will give you credibility with a lender.
Though each underwriter has different requirements, a business startup should have the last three years’ tax returns for each owner, including a copy of the tax transcript obtained from the IRS.
The business should also present its articles of incorporation (or organization, if a limited liability company) and a copy of a shareholder or operating agreement.
The lender may also request a copy of the letter from the IRS that provides the business with its unique tax identification number or “EIN.”
Include any lease agreements, contracts, or other legal documents that bind the company (or could bind the company, if the deal in question is contingent upon funding).
Each business owner should also supply a current bank statement for each personal depository account in his/her/their name. If the business startup has a bank account, that statement should appear in the portfolio as well.
Prepare Your Resume
Owning and managing require a lot of skill. Sadly, one of the reasons many businesses fail is due to a lack of expertise.
Provide your potential lender with a copy of your resume. Make sure it showcases any prior experience with any of the many hats you will need to wear as an owner.
The skills you will want to showcase are management, marketing, selling, finance, and others, depending on your industry. You will need to demonstrate an understanding of your industry.
You may have college degrees or completed coursework to list. You may have invested money in seminars, coaching or regularly studying books written for entrepreneurs.
Depending on your lender, you may have the opportunity to be interviewed and speak at length about your qualifications. If not, however, present them on paper whether requested or not.
Prepare a business plan
You will need to develop a bona fide business plan. It is entirely possible that your prospective lender won’t read every page of it.
Your lender might even skim through it. But do it anyway.
It shows that you are not treating your business like a hobby. It demonstrates that you have thought through the competitive advantages and disadvantages of your product or service.
Preparing your business plan also helps you think through how you will get customers, how your customers will pay you, how you will meet payroll, deal with accounts receivable, what pitfalls you will navigate around, your COGS, and whether your pricing is appropriate.
A picture is worth a thousand words: Adding a few photos of your building, equipment, product, you or an employee serving a happy customer, or a screenshot of your online storefront helps give the lender another perspective.
Preparing your business plan will help you understand and itemize your startup costs and give you an accurate dollar amount to request rather than a blanket amount.
Prepare your pro forma
A potential lender may request a pro forma independently of your business plan when you apply for your business startup loan. If not, you should include it within your business plan.
Make your most educated and honest guess about the company’s performance for the first three years. For each year, you should have a best-case scenario, a worst-case scenario, and a scenario that is somewhere in between.
Your lender is not expecting you to prognosticate your exact sales and expenses, but you should have a good estimate of your cash flow.
It is also a good idea to account for the estimated installment payments you will be making on your loan, to show the lender that you will be able to make those payments.
Once you turn your idea into a business and get it up and running, you’re over a big hurdle. Building business credit will then help you have continuing access to working capital.
Probably the number one mistake that small businesses make is ignoring the value of a business credit history separate from themselves.
Have questions about financing your business goals?