When applying for a small business loan or business line of credit, banks will look at a number of factors, including but not limited to sales records, industry type, number of years in business, assets and liabilities, account balances, net income and cash on hand.
There are a number of things you can do to improve your chances of getting approved for a small business loan. Preparing yourself as best as you can before you apply will aid in the some times lengthy approval process.
1. A Solid Business Plan
A business plan is a must, especially for a new businesses. New businesses lack a track record for banks to rely upon. A business plan does not have to be lengthy.
A good plan can be anywhere from 5 to 20 pages and should be concise. Your business plan should include all the important factors about your business. Your business plan can mean the difference in an approval or decline so take the time to make it a winning one.
2. Invest your own Money
Put your money where your mouth is. I know you have heard the term many times. There is some truth to it. Lenders like to see that small business owners have some stake (at least 30% equity) in their own business. Improve your chances of getting a loan and put some of your own money on the line.
Describe in detail what collateral you have to secure the loan. This may include equity in the business, borrowed funds, and available cash on hand.
4. Financial Statements
Financial statements will be required for your business and may also be required for anyone who owns 20% or more of the business. This may include owners, partners, officers and even stockholders. The financial statements should include a schedule of debts with balance owed, payment schedules, maturity of loans and collateral, if any, used to secure those loans.
5. Loan Request
Prepare a detailed report of the amount of money you are requesting and how the loan funds will be used. The report should include the type of loan you want and the amount of working capital you currently have on hand.
Being able to thoroughly explain why financing is needed is crucial to obtaining a loan. Lenders want to be assured you are requesting money that will be properly applied toward acceptable uses of the requested financing. Failure to properly explain why you need the money may cause red flags in a lender’s decision. Major reasons businesses seek financing:
- Real Estate Loans – Used for acquisition, construction, or improvement.
- Start-Up Loans – Most lenders will want to see at least a 25% contribution of personal capital towards the financing requested.
- Equipment Loans – Used to purchase equipment assets
- Working Capital Loans – Money used for operating cash and to produce profitable revenues.
- New employees and other staffing.
- Small business debt pay off.
6. Loan Repayment
Banks want to know when and how you will repay the loan. Use your financial statements and cash flow projections to convince the bank Convince the bank that you are able to repay the loan with the expected profits your business will experience. Explain in detail how the small business loan will increase your bottom line, profits. Be confident and assured in every document you present to the bank. The more sure you are the more sure the bank will be.
7. Improve your Personal Credit and Business Credit
Review your personal credit report before you start the application process. Some lenders may use your personal credit history, especially if it is a new business, to help them in the decision process. Errors in your credit report can cost you. Correct any and errors before applying and you will be ahead of the game. You may have to start the dispute process in order to get errors off your credit report.
If your credit report shows legitimate negative items such as bankruptcy or late payments, include a letter of explanation. The letter should explain the circumstances surrounding the negative entries and how you have made improvements so it will not occur in the future. You may also want to try a bad credit business loan if traditional banks turn you down.
Business owners and entrepreneurs should also make sure their business credit reports are accurate before submitting a credit application. One way of getting your business credit report is to contact Dun & Bradstreet.
8. Use Local Banks
Bigger is not always better. Try your local smaller community banks when seeking business loans. A smaller bank may be more inclined to approve a loan for small businesses in their area. Your application will more likely get more individual attention.
Online lenders are a good alternative if you cannot find a local bank. Prosper is an online lender providing business loans from $2500 to $25,000. Prosper offers great interest rates that are very competitive with local banks. Apply today.
9. Beat Your Own Drum
Portray a determined and confident business owner. Be enthusiastic about your venture and talk it up. Never allow rejection to deter you and don’t be afraid to let the bank know that rejection will not stop you from starting or growing your business. If you don’t get the loan ask questions, correct the problems and move on to the next bank.
10. Never Take No As the Final Answer
Turn rejection into a positive learning experience and familiarize yourself with the loan requirements and process. Always ask for additional information and find out why the answer was “No”. You may have an error on your personal or business credit report.
There may have been something the lender did not understand that needs further explanation. If you have had a hardship and were late paying some bills explain how that hardship is over and how you are back on track. You may have a high debt-to-equity ratio. A typical ratio is three-to-one. Lack of collateral or insufficient collateral is another reason a bank may deny. You will not know unless you ask.