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.
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
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
- 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
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
‘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