So, you're applying for a small business loan. Have you become so stressed you're seeing double? Is everyone around you lamenting that you'll never be approved? Are you starting to reconsider this whole entrepreneurship thing altogether?
Don't worry. This is all very normal. Applying for a small business loan is a scary thing, especially in the aftermath of the 2008 recession when banks began their seemingly neverending retreat from small business lending.
But the process of applying for a business loan doesn't have to be intimidating--as long as you have your ducks in a row. Grab a cup of coffee, take a deep breath, and follow along our nine steps to securing the perfect business loan for your needs.
Step 1: Have a Solid Business Plan
Whether you're seeking funding for a brand new business, or you've been building your business for awhile, having a strong business plan in place will be essential to securing your loan.
Your business plan is the lender's introduction to who you are and what your business is about. It tells them your mission and goals, and shows them the roadmap you've set out to succeed. From the lender's perspective, a great business plan means a high chance your company will succeed (i.e. a higher probability you'll pay back your full loan, plus interest, on time).
So many business owners are tempted to skimp on this step. Don't make that mistake. Take the time to write out every aspect of your business plan in thorough detail, and keep it up to date as your business grows and changes.
Step 2: Keep Immaculate Accounting Records
Along with your business plan, your accounting records show your lender a snapshot of your company's financial standing. Lenders will evaluate your balance sheets, income statements, and cash flow statements to determine the financial health of your business. Specifically, they'll be looking at your gross sales, profit margin, and debt ratio to determine whether you can afford the loan you're applying for.
So if you haven't been keeping your books totally up to date, now is the time to do some accounting spring cleaning. Remember, you won't be looking over your loan officer's shoulder as she reviews your annual revenue to say, "Oh wait! But that doesn't include XYZ client!" As far as she's concerned, what's written there in black and white is a comprehensive look at your company's financial standing.
Step 3: Determine How Your Loan Will Be Used
The purpose of your loan will have a big impact on what kind of product you'll need, and what you'll qualify for.
Are you borrowing money to purchase equipment for your business? An equipment loan may be the perfect choice for you. Or do you just need quick access to funds to cover cash flow while you wait to be paid by a client? You might consider invoice financing or a short term loan. If you need working capital to grow your existing business, a term loan will likely be your best bet.
Knowing what the loan will be used for will also help your lender determine whether the funding they are providing will ultimately help your business gain the necessary revenue to pay back the principal and interest on your loan.
Step 4: Decide How Much Money You'll Need
Once you've figured out what you plan to do with the funds you receive, develop a budget for the costs associated with the business needs you're seeking to meet. That budget will both help you decide what size loan to apply for and let your lender see why you've chosen that amount. Your loan amount will also be used to calculate your debt-service coverage ratio, which is a ratio lenders use to ensure that you have enough cash flow on hand to easily handle your monthly (or daily) loan payment. If your business in lacking cash flow, you will have a harder time qualifying for a larger loan amount.
The size of your loan can also impact the type of loan you'll qualify for, and which lenders will be the best fit for your needs. For example, if you're applying for a loan of less than $50,000, you might benefit from the U.S. Small Business Administration's Microloan program.
Step 5: Keep An Eye On Your Credit Score
As the online alternative lending space grows, more and more lenders are looking outside the box as they determine a borrower's eligibility for a loan. Even so, if you're seeking a loan, your personal credit score is still one of the greatest determinants of your qualification as a borrower. A credit score of 700 is considered excellent. If your score is 620 or above, you should have plenty of options. A score over 520 will still give you some options, though you'll be limited. If your credit score is under 500, it will be very hard to find loan options.
While you're at it, keep an eye on your business credit score as well. If you have an Employer Identification Number (EIN), lenders will also be able to monitor your business credit score and report through agencies like Dun & Bradstreet.
Step 6: Clean Up Your Credit Reports
If one look at your credit score made your heart skip a few beats, don't panic. Typically, if you legitimately have a credit score under 500, you likely know why without even looking. So if your number surprised you, it may be that there is some misinformation on your credit report that is adversely impacting your score.
For any business owner who may need a loan at some point, it's a good practice to check your credit report for accuracy every six months. Make sure that the information in your report is an accurate reflection of the way you've been doing business with creditors. If you find errors in your credit report, contact the reporting agency to begin the process of correction. A word of warning: this can be a long and arduous process, but the result of a clean and accurate credit report will make a world of difference for your loan application.
Step 7: Research Your Lending Options
Now that you know how much and why you're borrowing funds and you have gotten your credit reports in shape, it's time to research your lending options. Your first instinct may be to visit your local bank. However, the unfortunate truth is that since the 2008 recession, traditional banks have denied around 80% of small business loans--so don't be afraid to explore your options in the online lending space.
If you're not sure where to start, try a site like Fundera, which can offer you quick guidance on your nonbank lending options based on some basic information about your borrowing needs. You can easily compare various loan options from a variety of lenders to find the best loan for your needs.
Step 8: Complete Your Application
At this point, you're likely envisioning mountains of forms and having flashbacks to dreadful college essays. But I promise, it won't be that painful. In fact, if you've followed the above steps carefully, your actual loan application shouldn't be too difficult at all. Borrowers who come to the table with their necessary documentation in order can typically complete their loan application in a matter of hours, if not minutes. So do your legwork first, and you'll breeze right through this step.
Step 9: Wait, Celebrate, or Re-Evaluate
Once you submit your loan application, it can take as little as 24 hours or as long as a few months for your application to be processed and either approved or denied. The waiting game is no one's favorite. At this point, the best thing you can do is keep putting one foot in front of the other as you run your business. Continue to maintain your accounting perfectly and pay your bills on time. If something happens in the meantime that sets a dramatic shift in your business finances, let your lender know--especially if you think it will improve your application!
Eventually, finally, the phone will ring, and you'll get an answer about your loan. I hope you'll celebrating!
Of course, life happens, and not every loan gets approved. If your first pass didn't go as you'd hoped, re-evaluate the steps above and consider what choices you might make differently.
When a lender denies your loan application, they're ultimately sharing the concern that they don't think you'll be successful with that particular loan in your company's current financial situation. As easy as it is to get frustrated at a denied loan application, choose instead to heed that unspoken advice, and consider what type of funding may be a better fit.
It's a matter of finding the right funding source at the right time for your business. And it's out there, so don't give up!