What to Do Before Applying for a Small Business Loan
Applying for a small business loan is not something that should be done on a whim. If you want to get approved for a small business loan and make the process as smooth as possible you’ll want to plan ahead and properly prepare yourself. Approaching a lender unprepared is a common cause for denial. In this article I give you several tips on properly preparing yourself to apply for a small business loan. You should do these things before you apply for a small business loan. Doing these things before you apply for a small business loan will help you get approved the first time you apply!
Find a Legitimate Expert Who Can Assist You
According to Intuit’s Future of Small Business Report, if you know where to look and how to qualify you dreams of acquiring capital can become a reality. Your local neighborhood bank branch and/or credit union may not be able to assist someone in your unique situation. That’s why it’s good to know where to go beyond your local area. Funding your dream business can take time and that time can be reduced when you know where to look.
The internet can be a great place to connect with funding consultants (such as underwriters, loan brokers, etc.) who are either direct sources of funding or have long-term relationships with direct lenders. Finding a good funding consultant that is experienced and well-connected in the small business financing industry will enable you to identify the lenders that are most suitable for you.
The best funding consultants will be able to educate you on what you qualify for based on a number of factors including your personal credit history and your personal and/or business income, etc. Additionally, they will be able to help you identify the type of funding you will most likely qualify and what lenders you should approach. This will save you a tremendous amount of time and increase your chance of getting your loan request approved on the first go-round.
Obtain All 3 of Your Credit Reports & Scores
Obtaining all 3 copies of your credit reports and scores when preparing to apply for a small business loan is important because you’ll want to be aware of your credit standing. Furthermore, if you decide to hire a funding consultant to assist you, they will most likely ask for copies of your credit reports. The best funding consultants will be able to determine your creditworthiness by reviewing and analyzing your credit history. Determining your creditworthiness will enable a funding consultant to figure out the type funding you will most likely qualify (i.e. lines of credit, microloans, SBA loans, etc) for and what lenders you should approach (USAA, CitiBank, Bank of America, Capital One, etc).
Another factor to keep in mind is that your personal credit can be a huge determining factor in whether or not a lender will approve your small business loan request, especially if your business is a startup. Properly managing your credit will enable you to qualify for funding much easier than those who have damaged credit. Proper credit management consists of paying your bills on time (whether loans or lines of credit), and being able to maintain your credit accounts over a long period of time (at least 5 years of timely payments is ideal).
Gather All Required Documentation
Lenders will want to see certain documentation when you submit your loan application. These documents often include:
Up to Date Business Plan – Depending on how long you have been in business, you may or may not need a business plan if you’re applying for small business loans. Business Plans are usually needed for startups that have no track record. The business plan helps lenders understand how you will operate the business, get customers, and generate revenue. A good business plan will help lenders determine if you have the ability to pay back small business loans in the time frame they specify. Not convinced you need a business plan? Take a look at this article by Angel Investor Tim Berry for Entrepreneur Magazine and find out 15 reasons why you need a business plan.
Business Tax Returns – If your business is established, lenders will want to see your business tax returns so they can have proof of your what you spent (expenses) and earned (revenue). Business tax returns help lenders determine if your business is profitable enough to receive small business loans.
Personal Tax Returns – If your business is a startup, lenders will want to see your personal tax returns to determine if you earn enough income to pay back small business loans on time. They will compare your current income to your existing debt to come up with your debt-to-income ratio. If you have a debt-to-income ratio that is under 36% (in some cases 30%), you may have a better chance of getting approved for small business loans. Click here to calculate your debt-to-income ratio. Knowing your debt-to-income ratio before you apply for small business loans will help you determine if you need to pay down some of your debts before applying.
Business Bank Statements – If your business is established, some lenders may ask to see the last 6 to 12 months of your business bank statements to determine the frequency of your deposits. They will want to know how often revenue is coming into your business. The frequency of your deposits will help them determine how much you qualify for and if you can pay it back in a timely manner.
Year-to-Date (YTD) Financials – Your year-to-date financials is your profit and loss statement. You profit and loss statement should outline your expenses, profits and/or losses for the last twelve months. This (in addition to your business tax returns) will help lenders determine whether or not your business is profitable enough to obtain small business loans. Keep in mind that your business tax returns and your profit and loss statement should match. If there are any discrepancies in the numbers, lenders will notice and your run the risk of being denied.
Company Debt Schedule – Your business debt schedule should outline all of the money you have borrowed from lenders. The debt schedule will help lenders determine if you have borrowed all that you can borrow based on your revenues and/or equity in the company. According to the SBA, most lenders don’t want you to have more than four times the amount of equity you own in the company in outstanding debts. If you are over this amount, your focus should be paying down your existing debt so you will have a better chance of getting approved for additional small business loans.
Copy of Contracts – If you have an established business and you have contracts with other companies, you may be able to get small business loans based on the amount of those contracts. Be sure to have a copy of the contracts on hand in case a lender asks to see them. An example contract could be a purchase order or letter of intent.
A/R Aging Reports – If you have already started invoicing your clients and are waiting to be paid, you may be able to qualify for small business loans based on your outstanding receivables. You will need to have an accounts receivables aging report readily available because a lender may ask to see them.
Personal Financial Statement
A List of Your Business and/or Personal Collateral
Depending on the lender, you may or may not have to submit the documentation outlined here. The right funding consultant will be able to tell you what documentation you’ll need to submit and help you submit it. Gathering the required documentation before approaching a lender will help speed up the decision process.
What Lenders Expect to Approve Your Small Business Loan Request
Again, it’s important to be prepared before approaching lenders. The only way you can be prepared is if you know what lenders expect of you. There are 5 things lenders look for when reviewing most small business loan requests. If you keep these in mind and act on them, you will have a better chance at getting your small business loan request approved the first time you apply.
- Your Character & Personality – Some lenders will consider your character and personality when reviewing your small business loan request. When you sit down to meet with a lender, it’s important to show them the positive aspects of your character and personality. Smile and be enthusiastic. Show them you have a sincere passion for what you are doing. Obviously not all lenders will care how great of a personality you have but it’s good to show them you have a positive attitude. They may be able to convince their lending board that you are an ideal candidate for a loan because of your character and personality.
- Your Personal Credit Score – Your personal credit score is absolutely critical to lenders when reviewing your small business loan request. Even if you have a great personality, if your creditworthiness doesn’t measure up, you will get denied. Lenders prefer lending to borrowers who are dedicated to meeting their financial obligations. If you have less than perfect credit but a great personality, you’ll have to start working on rebuilding your credit history to prove to lenders that you actually care about meeting all of your financial obligations on time.
- Your Ability to Repay – You will need to show a lender you have the ability to repay any small business loan you borrow from them. Lenders don’t want to lend to anyone who is unemployed or doesn’t have a consistent and reliable income. Even though you are starting a business, it will be best to keep your day job for as long as possible. Being able to show a lender that you have been employed for at least 6 months is ideal.
- Your Ability to Invest Your Own Funds – If you truly believe in your business, you will have some of your own funds to invest. Depending on the amount of the loan request, lenders may require you to invest a percentage of what you are asking for. For example, if you are requesting a $50,000 small business loan, a lender may require you to invest 10% of that out of your own pocket. Be ready to show proof to a lender that you have your own capital to invest.
- Your Access to Collateral – Most traditional lenders will require you to provide them with collateral (unless you are applying for unsecured funding, such as an unsecured business line of credit). Lenders may ask for real estate or sometimes business equipment like machinery. Alternative lenders may require other forms of collateral such as your future receivables.
Entrepreneurs & Small Business Owners Who Prepare Get Approved
According to Intuit’s Future of Small Business Report, lenders are lending to qualified small business owners. If you are creditworthy, have a business plan, revenues, a consistent income, and/or collateral, you’ll find that your chances of getting approved for a small business loan increase tenfold. It pays to properly prepare yourself before applying for a small business loan.
What to Pay Attention to When Analyzing a Small Business Loan Offer
If you’ve applied for a small business loan and you’ve been approved, there are a few things you will want to analyze before deciding to accept the offer. It’s unwise to accept just any small business loan offer, even if your business is dire need of funding. You don’t want to accept a small business loan offer and regret it later because it cost you an arm and a leg.
To determine how much a small business loan will cost you over time, it’s important to analyze the different components of it. This includes the terms, interest rates/APR (i.e. annual percentage rate), and other fees (I.e. closing fees). Below, I explain the meaning of each and how it affects the overall cost of your small business loan.
- Term – The term of the small business loan is how much time you have to pay it back. When you get approved for a small business loan, you are required to back it pay in monthly increments over a term. The monthly payback amount includes the balance borrowed and interest rate. Depending on the nature of your business and financial situation, you may need a longer term to pay back the small business loan. When analyzing a small business loan offer, keep in mind the amount of time you will have to pay it back.
- Interest Rate/APR (Annual Percentage Rate) – You will be charged a percentage of the small business loan for borrowing the small business loan. You will have to pay this percentage of the small business loan on top of the original balance borrowed. According to NerdWallet, the APR is what truly communicates the overall cost of a small business loan. It determines the total amount you are actually required to pay back. When analyzing a small business loan offer, keep in mind the amount you will have to pay back in combination with the original loan amount.
- Other Fees (i.e. Closing Fees) – Some small business loans have a closing fee associated with them. These are usually non-recurring fees that are only due at the time of the loan closing (i.e. when you sign the documents to accept the small business loan offer). The amount of the closing fee usually comes out of the small business loan you’re offered. Therefore the overall amount you end up with from the small business loan is just a tad bit smaller. You are still, however, required to back the full small business loan amount, since, technically the closing fee came out the loan you accepted.
What to Do if the Bank Denies Your Small Business Loan Request
So your small business loan request was denied by the bank? Now what? That’s a question that many entrepreneurs and small business ask themselves after they are turned down by a bank. The good news is that you don’t have to feel discouraged or defeated after having your small business loan request denied. You may have other options. One of the first things you should do after being denied for a small business loan is ask the bank why. Don’t settle for a generic denial letter.
Call the bank and ask for a detailed explanation of the reason for denial. Searching for other small business loan sources with the help of a small business loan broker can also be very helpful. You may be able to find a lender who will approve you through a small business loan broker. This is because small business loan brokers often have developed long term relationships with lenders. They refer hundreds or thousands of clients to those lenders every year, making those lenders a lot of money. Those lenders trust their brokers and will sometimes fund deals they refer that other banks have denied.
Search for Other Small Business Loan Sources
There are many ways to obtain a small business loan for your business. Banks are not the end all be all. After learning why the bank denied you in the first place, you’ll have a better understanding of what you need to do to qualify. Once you have a better understanding of what you need to do to qualify, you can work on it. You can also seek out other financing sources that may not be as strict as traditional banks.
A Small Business Loan Broker Can Help
To save time, we suggest working with a small business loan broker to obtain financing for your business. The best small business loan brokers work with different lenders that offer different types of financing. They also understand how all of the different types of small business loans and financing options work for small business owners. They will be able to clearly explain the differences between financing options so you will know what you are getting into before you accept anything.
How a Small Business Loan Broker Can Help You “Find Capital”
Small business loan brokers can be very beneficial to you on your journey to acquire capital for your small business. The best small business loan brokers are experienced and well-connected in the financing world. They also have access to direct and indirect lending sources all over the country. Experienced, well-connected small business loan brokers who are ethical and have your best interests in mind should be able to help you secure funding. Small business loan brokers often get a bad rep and people tend to wonder why the need a small business loan broker. The fact of the matter is, the best small business loan brokers will help you simplify the process of obtaining capital. This is significant because raising capital can be difficult to obtain if you don’t know what you’re doing. The best loan brokers do this in 4 ways:
- They educate you on the many funding options available to you. There are tons of different funding options available to small businesses and thousands of sources of funding. The best small business loan brokers will educate you on the many different types of funding and help you determine which type of funding is going to be the most appropriate for you based on your unique situation.
- They analyze your personal credit, business credit (if applicable), and your financial situation to determine what you’ll most likely get approved for. All lenders have criteria in place that you must meet to get approved for funding. Many of those lenders will take a look at your credit reports to determine your creditworthiness and your financial data (e.g. bank statements, check stubs or w-2’s and tax returns) to determine your ability to pay back whatever you borrow. A small business loan broker who views this information before you go to a lender can tell you what you will qualify for after analyzing the information. This will give you a leg up with most lenders because you’ll already know what they expect of you. All you will have to do at this point is prepare yourself to get approved by meeting the criteria set in place by lenders.
- They refer you to the most appropriate lender based on your personal (or business) credit history and your financial situation. After a small business loan broker evaluates your personal (or business) credit history and your financial situation, they should be able to determine the most appropriate lender(s) to refer you to. The most appropriate lender(s) would be the lender(s) that will most likely approve you based on your current situation. This will save you from having to search for and apply to multiple lenders (that may not be appropriate for you) on your own.
- Persistence. Sometimes obtaining capital depends strictly on sheer persistence. The best small business loan brokers will continue to help you secure capital, even if the initial sources they refer you to don’t work out.
Overall, the best small business loan brokers will help you minimize the amount of time you spend searching for capital. Since the best small business loan brokers are already connected to a variety of different lenders and they know and understand what type of borrowers those lenders are looking for and they can match you with the source of funding that’s most likely to approve you. Working with a small business loan broker could increase your chances of getting approved for a small business loan, the first time you apply.
How to Identify the Best Small Business Loan Broker
All small business loan brokers are not created equal. Some are only out to make money off of you. That’s why it’s important to do your due diligence before choosing the small business loan broker you will work with. Find out how long they have been in business and ask for verifiable references. You should be able to reach out to the references if necessary. Also conduct a Google search to find out if they have any complaints online. If you find any complaints, speak directly to the small business loan broker about them. Sometimes people can write unwarranted complaints online so it’s best to ask the small business loan broker what happened (before jumping to any conclusions). Using LinkedIn to find out more information about them might also be helpful. Most of the best small business loan brokers online have a LinkedIn profile with recommendations. At the end of the day, use your best judgment. If what the small business loan broker is telling you sounds too good to be true, it probably is.
LenCred is an Expert Small Business Loan Broker
Here at LenCred we specialize in helping entrepreneurs and small business owners obtain unsecured business lines of credit. However, we also have access to other financing sources. We can help you figure out what will work best for you based on your unique situation. If you’ve already been denied by a traditional bank and you are unsure why, we may be able to point you in the right direction. We will analyze your personal credit history and let you know if you qualify for unsecured business lines of credit. If you don’t, there may be other types of financing we can recommend. Depending on how long you’ve been in business (amongst a number of other factors), you still may be able to qualify for a small business loan.