If you want to start or expand your business, and need a little influx of cash, it might be time to explore getting a small business loan. Although the process can be time consuming, there are steps you can take to maximize your chances of getting the type of loan you need.
Be Prepared Financially
Before you apply for a small business loan, remind yourself of the Boy Scout motto: Be Prepared. Think like a lender and be sure you have all the elements needed to be a good loan candidate. Start by making sure your personal credit is excellent. You can do this by keeping up with all your payments each month and paying off excess debt whenever possible. Then gather all your financial documents, ensuring they are up to date.
Applying for a small business loan is similar to applying for any line of credit, so follow all of the same applicable rules. Don’t make any major changes with your business and avoid making huge purchases right before applying for your loan. Lenders adore stability, so give them what they want.
Review your financial documents from a lender’s viewpoint. Make sure you clearly demonstrate that you can repay the loan while continuing to meet all your other business expenses on time and without difficulty, such as paying your employees and purchasing materials. You will need proof of all your assets and sufficient collateral. Yes, the old adage is true: You need to have money to borrow money.
Lenders also want to see that you can handle a substantial debt load. Your credit score might be perfect, but if you don’t have a track record for handling large loans, they will likely hesitate to be the first to loan you huge sums of money.
In addition, it’s a good idea to have a backup plan in place for repaying your loan. Extra security helps you (and the lender) feel confident about the loan. If you don’t have the assets to cover the loan amount, keep in mind that lenders sometimes require a personal guarantee. This means that you, personally, will be on the hook for the money if your business can’t make the payments. It’s a risky move.
Bottom line, whether you plan to apply for a loan or not, set up your business as if you were going to apply for a loan from the start. It will help you achieve financial stability.
Create a Solid, Compelling Resume
Lenders want to know who’s steering the ship, who is in control of your business’s financial decisions. To that end, you must construct a resume that is detailed, thorough, and compelling. It needs to tell your business’s story, giving the lender insight into who you are and how your business got to where it is today. Lenders look for the same things that a prospective employee would want when looking to get hired by you. For instance, they want to see that you’ve gained steady experience in your field of expertise. Long gaps of unemployment, or extreme fluctuations in revenue would not be desirable.
- A good resume should include:
- An objective, written with the lender in mind
- Highlights of your skills and qualifications in bullet form
- Relevant work experience in chronological order, starting with your most recent jobs
- Any volunteer work
- Any relevant education
If your resume is a bit sparse, work on expanding the weak areas, by creating opportunities that will help you get a loan. For instance, consider taking extra courses at your local college, which can be added to the education section of your resume. You might also consider taking a seat on the non-profit board of a relevant group. Or you can start offering a little free service for the local community. These activities will not only fill out your resume, but may give you added public relations.
Keep Your Business Plan Brief
The weight of your business plan doesn’t directly correlate to the size of the loan you can get, as some will have you believe. Whoever your potential investor might be (unless she’s your great Aunt Tilly, who probably wouldn’t want to read a business plan anyway), they are more than likely far too business to read three phone books worth of data in order to evaluate your loan application. These business plans typically go to the bottom of the stack.
An investor wants to see the basic elements quickly and easily, and won’t spend the time hunting for your plan’s overview and projections camouflaged in fluff. Tell a compelling story about your business and your need for money in a concise way, reminiscent of an elevator pitch.
Patrick Hull, a successful serial entrepreneur for twenty-five years and contributor to Forbes magazine, advises, “Get rid of the fluff. You should always be as concise as possible and remove any filler language. Even if it sounds nice, fluff gets you nowhere and wastes space.”
As with any form of writing, the axiom show, don’t tell holds true. For instance, if you want to tell your investor that you’ll be conservative with their money, show them that with your plans and projections. If you tell them you’re conservative then show them wild projections, it sends a poor message.
No business is proof against potential problems. Address any issues that might come up in your plan, including detailed solutions for how you will combat those difficulties should they arise. Ignoring potential future problems is a red flag for a lender.
In general, lenders are super conservative, so if you appear too outside-the-box, you will likely be considered a risky prospect. Proven courses of action, with effective track records, will appeal to bankers.
Having said that, investors are looking for creative approaches. One way to show creativity to a conservative audience is to avoid using a template design for your business plan. Make it uniquely yours. It will go a long way to showing them who you are!
Shop ‘til You Drop for a Loan
As a business owner, you’re probably accustomed to getting multiple bids for any major expense. Keep that good practice alive when applying for a loan as well. Don’t limit yourself to one lender, even if your local bank seems more convenient.
The good news is, you have choices. Research these three options:
- Traditional banks
- Government-backed Small Business Administration (SBA) loans
- Alternative lenders, such as online banks
Of course, there are plusses and minuses to each option. Traditional banks and SBA loans often give you the lowest interest rates, but they both require a lot of paperwork and a stellar credit report. While alternative lenders can be pricey, they often approve loans for applicants with less-than-perfect credit. This can be a popular choice for start-ups, because of the quick speed of the process.
While the procedure for applying for a small business loan can be a long and tedious one, it’s well worth the extra money it will provide. It can bring you that much closer to achieving your goals and proves you are in a position where you can request money from a lender, that your business is stable. Expansion is just right around the corner!