How Do I Get a Business Loan?
Different loan terms work better for different businesses and distinct situations. How do you know which one is best for your needs?
Whether you’re just starting out in business or have been running a company for years, there will likely come a time when you’ll need to invest more money than you have in order for it to grow and flourish. A small business loan will help you hire the staff you need, upgrade your equipment, open a new branch, or do any one of the many things that will make you more successful.
By putting in some work before you apply, you’ll increase your chances of being approved. As you go through the process, remember to keep your audience in mind. Think about every part of your application from the lender’s point of view.
What are lenders looking for? As much certainty as possible that they’ll be paid back. They want to feel confident in you as an owner. And they want to feel that if the business goes through a difficult period, you’ve got enough personal reserves or collateral to get through the rough patch. Here are three steps to getting a business loan.
1. Research and Prepare
The more work you do in advance of your application, the more likely you are to succeed in securing a loan. Make an appointment for a consultation with a loan officer (or two or three). Find out exactly what the climate is like and how your business or industry is looked at right now. Educate yourself about the process so you know what to expect and can talk intelligently.
Research possible lenders
For small businesses, smaller banks and microlenders, which specialize in loans up to $50,000, may be a better possibility than larger ones. If you’re approaching traditional banks, one where you have a relationship is a great place to start, since you’re already doing business there.
We really can’t stress enough that the biggest part of the bank’s risk is the uncertainty about being paid back. Anything that will reduce that uncertainty puts you in a better position. So if you have your mortgage or business checking account with a bank, that’s a great place to start asking about small business loans. You’re also more likely to get closer to the actual decision maker if you approach a community bank or credit union than a larger national bank.
Use business resources
The government’s Small Business Administration has Small Business Development Centers around the country where you can get guidance on the best way to present your business to a lender and what types of loans you might qualify for. You can also use AOF’s free business resources to learn how to get your business loan-ready.
2. Assemble Your Background Information
What’s past is prologue, Shakespeare wrote, and how you have handled your finances personally and professionally up to this point will be a huge indication to a potential lender about how you’ll operate this time around. You can’t change your history, but you can make sure your financial house is in order. If your personal affairs are messy, a bank is likely to conclude you’ll handle your business the same way.
Do a credit check
By law, you’re entitled to receive a free copy of your credit report from each of the three big credit bureaus, Experian, Equifax and TransUnion, once a year. To do so, you can visit the central website they set up for this purpose or call toll-free 1-877-322-8228. Dispute any negatives that show up but don’t belong.
Pay down your balances
Pay off any existing loans, and pay down your credit card balances. Your credit score will be higher if your outstanding balances are less than 50% of your credit limit; 30% is even better for a more favorable rating, while 10% or less is ideal.
Prepare your pitch
Be able to clearly explain why you need the money. A lender will want more than vague ideas about expanding, and will need to know precisely what the funds are earmarked for.
Have a compelling reason why you’re applying. Do you need money to keep up with an industry experiencing major growth, or because you have a wonderful partnership opportunity with an existing successful business?
A passionate belief in yourself can be infectious and make others believe in you as well. Read these tips to learn how to create a successful business pitch.
Share your relevant experience
Ideally, a lender will want to know you have a proven track record with this particular business, so years of profit statements would be the dream. In reality, you may not have that much history with this company, especially if it’s a startup, so having experience in and knowledge of the industry in general would also be a plus.
If you have no direct experience with this area of business, a lender will want to know you have a key member of your management team that does. Generally, getting significant funding is far less likely if you’re a total newbie. Again, it all goes back to their level of confidence in getting paid back.
3. Loan Documentation
The more organized and complete you are with having documents and paperwork ready to go, the smoother the loan process will go. Be thorough and complete when putting together your application. Don’t get delayed or turned down because you didn’t provide everything asked for.
It may sound basic, but check for typos, spelling mistakes, and grammatical errors in all the material you put together. Presentation is important. If you can’t get it together for documentation as important as this, that’s an indication to a lender that your attention to detail in other areas of your business might not be what it should be, either.
What do you need to prepare?
Most lenders will want to know how much the business is worth and how much money you’ve been making. A startup business will not have these, obviously, and will have to rely on projections.
Learn more about financial documents and access to capital in this interactive article.
Sales and cash flow projections
These can be especially helpful in getting loans, especially if they’re favorable. This isn’t wishful thinking, however; be prepared to explain the numbers with a high degree of credibility.
Personal background information
You’ll most likely have to provide your previous addresses, any names you’ve used, your educational background, and any criminal record you might have.
Income tax returns
Present at least 3 years’ worth of both personal and business returns.
Personal and business credit history
The lender will run a credit report on you, but as we suggested above, you should already know what it will show. Take the time before applying to make sure your report is accurate. You can get a free Business Information Report on your business from Dun & Bradstreet through its website, www.dnb.com, or by calling 800-234-3867.
A business plan
As you know from our series on business plans, most lenders will want to know you have a well-planned strategy for how to succeed. Your business plan is the roadmap you’ve charted for your company, taking all of the current market conditions into consideration. A strong business plan will definitely help boost a potential lender’s confidence in your chance of success.
Personal financial statements
Many loan programs will require owners with a greater than 20% stake in the company to provide signed personal financial statements. These can be included in your business plan or as stand-alone documents. Microsoft Office has a template you can use provided by SCORE, the Service Corps of Retired Executives.
Have at least one year’s worth of personal and business bank statements.
These may also be presented as part of your Business Plan, but be prepared with copies of your Articles of Incorporation, any business licenses or registrations applicable for your business, copies of any contracts you have, franchise agreements, and commercial leases.
Business Loans for Startups
This is probably the most difficult category of business loans to get approved for, although it’s certainly possible if you have a strong business plan, a decent level of personal investment, and, in some cases, collateral.
Again, you’re typically going to have better luck with smaller community banks, credit unions, and microlenders that specialize in making smaller loans to relatively unproven businesses.
Business Loan Advice for Everyone
Be persistent and thorough. Even if you’re turned down by several different lenders, that doesn’t mean everyone will say no. From the research you’ve done, put together a top-ten list and work your way through it, tweaking your business plan, if necessary, based on the feedback you’ve gotten. If your application is denied, find out why and make whatever adjustments you can.
Shop around for the best APR
Not all banks are equally comfortable in different industries, so keep looking until you find the best fit. If you are fortunate enough to have a strong application, you may be in the enviable position of getting to choose between offers. Compare the interest rate, the term of the loan, and whatever other conditions the lender might be asking for.
If your business meets the relatively strict guidelines of the Small Business Administration, the agency can help direct you to a lender it partners with for an SBA-guaranteed loan. You’ll still have to earn the bank’s approval, but at least you know you’re starting with an institution inclined to lend money to a small business. Banks that grant SBA loans put a particularly strong emphasis on business plans, cash flow, and profit forecasts, so make sure yours measure up before applying.
You can also consider alternatives to banks. State and local economic development agencies, as well as numerous nonprofit organizations, provide low-interest loans to small business owners who may not qualify for traditional commercial loans.
Check out specialty programs
If you are a woman, minority, or fill a specific business niche, there may be dedicated funds available for you. Do your homework and reach out to lenders with loan programs that may look more favorably on your unique circumstances, such as for women in technical fields or minority-owned businesses in emerging growth areas.
Get approved for a small loan
You’re more likely to get approved for a modest amount of money than for a larger loan. Scale your request for the smallest amount possible to achieve your next step and grow your business. Once you pay that loan back, the lending institution will likely be open to considering a larger amount the next time, after seeing proof of your ability to repay.
Apply for the right type of loan
A line of credit, where you take out funds as you need them, may be easier to qualify for than a straight loan, where you receive the money in one lump sum. In many cases, a line of credit could very possibly suit your needs. If you need a quick infusion of money to buy seasonal merchandise, you could borrow that from your line of credit and quickly repay it, rather than taking out a larger amount for a longer term.
Get a loan before you really need it
The most powerful way to qualify for a loan is to build business credit. Consider applying for (and starting to pay back) a loan before you actually need it. You look much more attractive to a lender when your finances are healthy than when you’re facing a glitch, even if it’s just temporary. Inc.com reports that 60% of businesses that fail are profitable, they just didn’t have the cash flow to keep the doors open and the lights on.
In today’s business climate it may be challenging to get a small business loan, but it’s quite possible. And you can certainly help your chances by being as prepared as possible and concentrating your efforts where they’re most likely to succeed. Do the prep work before you apply, and you’ll get back to the work you want to do sooner rather than later.