Small-business loans are still difficult to obtain, so it makes sense that when you apply for one, you do all you can to increase your chances of approval. Here are some principles that can help smooth the way to approval.
Go in Prepared
Gone are the “fly by the seat of my pants” types of loan requests. These days, banks scrutinize every aspect of a loan application, business, and business owner before they approve a loan. The better prepared you are when first approaching a banker, the better your odds of an approval. And it will likely help speed up the process because you will have provided everything they need up front. Here are some tips on getting prepared:
- Assess your creditworthiness. Bankers are not big on risk, so a good credit history and low debt ratio for both you and your business will go a long way in securing a loan. If your report isn’t up to snuff, pay down some debt, remove errors, and think about waiting to apply until you can show at least six months of good credit history.
- Organize your financial information. The bank will want to see complete financial information for your business and for you personally. Your goal is to show that you have been financially responsible in the past and have run your business well so the bank can trust that you will do so in the future. According to Pepperdine University’s 2014 Capital Markets Report [PDF], 44 percent of business owners who were denied a loan say that in order to apply again, they will need to improve the financial health of their business.
- Write a business plan. A banker won’t even consider giving you a loan without a well-thought-out business plan. This applies whether you are a startup or run an established business. The goal of the business plan is to show the banker that you are serious about the business and have done both short and long range planning and have a strategy to ensure its success.
- Share your future plans. In addition to showing the banker that you have performed well in the past, you’ll need to prove that you have carefully considered what you will do with the funds, how much you need, how the money will help grow your business, and how you repay the loan. Include as many facts as you can to show that you have done your research. Have the concept meticulously thought out and on paper before you approach a lender.
Don’t Stop at the First Rejection
Maybe you’ll be lucky and get approved on your first try, but if not, don’t take that to mean that every bank will turn you down. According to the Pepperdine study, small-business owners who were successful in getting the capital they needed contacted an average of 2.38 banks before they received a loan. And just because you get one approval, that doesn’t mean you should stop looking. You may be able to get better terms if you talk to a few more banks.
Consider an SBA Loan
You should include a few SBA lenders in the list of banks you plan to approach. They have counselors who will help you with the loan process and can answer questions about your unique situation. In addition, they have loan programs that are geared toward applicants who want smaller loan amounts. But be sure to ask the banker about other loan products that aren’t guaranteed by the SBA so you know what all your options are. To find out more about SBA loans, visit their site.
Preparedness, meticulous paperwork, and a clear-cut idea about the loan and its purpose for your business are all crucial factors a banker will look at when considering your loan application. Improve your chances by giving bankers what they want before they even ask.
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