Small-business loans can be difficult to obtain, so when you apply for one, it’s helpful to takes steps to increase your chances of approval. Here are some principles to keep in mind.
Go in Prepared
Banks tend to 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 more likely that the process will run more smoothly because you have provided everything they need up front. Here are some tips on getting prepared:
- Assess your creditworthiness. 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 consider waiting to apply until you can show at least six months of good credit history.
- Update your financial information using a bookkeeping system like QuickBooks to prepare your financial statements. 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.
- Write a business plan. A traditional bank usually won’t consider giving you a loan without one. The business plan shows the banker that you are serious about the business and have done both short and long range planning and have a strategy for its success.
- Share your future plans. In addition to showing the traditional bank 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 will repay the loan. Include as many facts as you can to show that you have done your research.
Pitfalls to Avoid
Stopping at Rejection
If at first you don’t succeed at securing a loan, it does not mean that every bank will turn you down. Banks that are SBA lenders might be among the lenders that may be appropriate for your business loan. SBA banks usually have counselors who can help you with the loan process and can answer questions about your unique situation.
Conversely, if you get one approval, keep looking. You may be able to get better terms if you talk to a few more lending institutions.
Be Prepared to Address Cyclical Business Model
If your business features a cyclical sales model–that is, one that is particularly depending on economic upturns and downturns (like luxury suppliers)– a lender may consider it a risky investment. Small businesses that have this model can offer enhanced security in the form of co-signers, personal guarantees, or assets. Additionally, you can research banks and other lenders that currently support businesses in the same industry.
Preparedness and a clear-cut idea about the loan and its purpose for your business are all factors a lender will look at when considering your loan application. By conducting research and considering all your options, you can make a sound decision for your business needs.