August 13, 2018 | Last Updated on: August 1, 2023
These days, it’s easier to start a small business than ever before. With the rise of social media for business and various new distribution methods, you no longer need a lot of upfront capital to get started in the entrepreneurial world. However, if you want your business to thrive, you’re going to need to invest at least some money in it. This is where small business loans can help.
Borrowing a fixed amount of money to start or grow your small business is a smart choice, but it’s not always easy. As an owner, you’ll need to be prepared for a rigorous application process and to answer any questions the lender might have about you and your business. It means your business plan needs to be watertight, as do your personal finances. You also need a detailed strategy for how you will pay the money back.
If you have a great idea for a business and a solid plan for growth, you shouldn’t let a lack of cash hold you back. However, before you try to get a loan for your small business, you do need to prepare yourself for the application process. Here are seven tips to help you borrow effectively for your small business, and that will boost your chances of getting approved.
1. Find the right lender
There are certain criteria you have to meet when you go to get any kind of loan. However, if you’re able to, seeking out the right lender will increase your chances of being approved and could score you a better deal.
Some lenders may lower their rates when they find out you’re talking to other banks, while some might be so eager to approve you that they’ll give you a great deal from the get-go – even if there’s no competing offer on the table. Like anything else, it’s always best to shop around before you agree to any terms.
Don’t just get stuck thinking about your traditional bank as the only source of funds for your business. Small banks or alternative finance companies can often be a great choice for business owners. If you want to boost your chances of getting approved for business loans and make sure you get the best deal possible, it’s worth taking your time and doing some research before you start your application.
2. Be specific
Don’t approach a lender with only a rough idea of how much you need to borrow – you need to be as specific as you can about the amount you need and exactly what you will use it for. Show your business plan and describe the areas where you will distribute the funds to grow your business and turn a profit. Outline your growth strategy point by point. Show records of your finances so your lender can see you have the capacity to make your loan payments. Necessary documents to share with your lender might include a formal business plan, business and personal tax returns, and your latest financial statements. All of these things will help you make an effective loan application and improve your chances of getting a “yes” from your lender.
Necessary documents to share with your lender might include a business plan and strategies, business and personal tax returns, and your latest financial statements.
3. Consider the five C’s
Business owners should consider “the five C’s” when looking for funds for their company, including SBA loans or franchise loans. The C’s include the current conditions of your business, your capacity to repay the loan, how much additional capital you need, the collateral you will use to secure the loan and your overall character as an individual and business owner. By preparing your answers to these five questions, you’re more likely to be approved for a loan.
Here’s a quick list so you can remember them all:
4. Don’t neglect your personal credit score
When it comes to small business loans, business is personal. It’s you who will be paying the money back, so your lender wants to see that you can handle your own finances before they decide if you’ll make a responsible borrower. When it comes to credit, different lenders will have different requirements, but ideally, you should aim for a score of 700 or above. If you’re worried that your credit score might stop your business from getting approved be sure to ask the lenders you speak to about their credit score requirements up front. Some banks won’t lend to people with scores below a certain number, but there are many alternative finance companies that will still work with you even if your score isn’t the highest it could be.
5. Have a sufficient down payment
Depending on the lender and the amount you require, you will most likely need to make a down payment on the loan of around 20-25%. If you have a mortgage or a car loan, you’ll be familiar with this process, but you’d be surprised how many small business owners don’t consider this when they go to ask for a loan for their business. A lender will look to see that you have enough money to cover your down payment, as well as adequate cash flow to cover the monthly repayments. You can plan for this requirement in advance by finding out what kind of down payment your lender needs. You may be able to avoid the down payment if you work with certain lenders or alternative finance companies. Keep the down payment in mind when you’re shopping around!
6. Know your lender
When you’re looking for a loan, researching different lenders could be the difference between an accepted application and a rejected one. Different lenders use different criteria to evaluate the financial health of a borrower; some also have different timelines for approval, so an understanding of your requirements will improve your chances all-round. It doesn’t help you much if you need a loan this week and the lender you’re applying with usually takes a month to make a decision. Before you apply for a loan, find out what the lender’s requirements are and make sure you understand their procedure for the application. The more prepared you are when it comes to the application, the better, especially if you are considering a major investment like buying a business or acquiring commercial real estate, for example.
7. Be honest
It’s tempting to bluff your way through a loan application and hope that it swings in your favor, but this is certainly not recommended. By all means, point out the unique strengths of your business, but resist the urge to paper over the truth. Never submit false financial documents or make claims about your business that your tax returns won’t support. Manipulating your numbers will get exposed in the end, and it could land you in hot water as well as undermine the integrity of your business.
One more thing to keep in mind is every lender’s favorite four-letter word: risk. Every business loan provider is essentially taking a risk when they decide to lend your business money. Find out what your risk factor is and understand how a lender is going to view it. There are tools online that can help you see your business the way lenders do, which will make you that much more ready when you go to apply. Don’t shy away from the truth and hope your lender won’t spot the holes in your application; be honest about your strengths and weaknesses, and make sure you have a foolproof plan to address them.
If the risks are too great for the lender, remember that a loan will be risky for you too. While there’s no guarantee your business will make a profit, you should do everything in your power to prepare for the worst case scenario. Only take out a business loan if you’ve run your business plan under a microscope and know exactly how you’ll pay the money back. However, with proper planning and preparation upfront, there should be no reason why your small business won’t get approved for the loan you want.
