Steps to Qualify For a Small Business Loan
Qualify For a Small Business Loan
Small businesses can usually borrow from commercial banks, various organizations affiliated with the Small Business Administration (SBA) or other internet-based lending companies. The first step in this process is to determine the financing needs and how your business will use the loan results. The next step is to write a business plan that is both a business plan, financial projections and how the business strategy is aligned with financing needs.
Then, consider various credit factors that can increase the chances of getting a loan, such as guarantees, potential positive cash flow and a strong resource management tool. Next, arrange documentation for loans that cover various legal and financial documents. Finally, compile a list of lending organizations and start contacting and meeting them to measure who is interested in lending and what the requirements are before you complete the best available match.
1. Financing Needs
Before contacting a lender, carefully evaluate your financial situation, and determine the purposes for the loan. In particular, figure out how much cash flow the business generates and what main areas need capital infusion. The business may need to expand. The business may be starting from scratch and in need of financing to purchase capital assets and finance working capital, such as buying necessary inventory, paying vendors and covering other fixed operating costs.
Depending on the nature of a business and the financing need, lenders can demand different compensation for the assumed risks. If the business operates in a cyclical industry and asks for a loan to purchase capital assets, the interest rate is typically higher. On the other hand, a noncyclical business, such as a food producer asking for a loan to finance inventory purchases, can expect lower cost of loan.
2. Business Plan
Preparing a business plan is one of the most important steps in the loan application. The document should outline the purpose of the business and how it operates, and it should contain historical financial statements and financial projections three to five years ahead. The business plan should also outline how the business intends to grow revenues and profits in the future. A thorough plan helps both parties in the loan. Step back and think carefully about key elements for the success of the venture.
While there are many tools that assist in preparing a strong business plan, the SBA's Business Plan Tool is a helpful resource for any small business owner.
3. Other Credit Factors
When preparing for the loan application, consider credit factors that can improve the chances of obtaining a loan. Demonstrate that the business generates sufficient cash flows to cover operating expenses and pay for the loan principal and interest in the future. If there is collateral that can be pledged for the loan, it can assure a lender that there are other source of the loan repayment.
Demonstrate solid resource management in the form of effective managerial character and capacity and strong key managerial metrics, such as positive working capital, low debt-to-worth ratio and a proven track record of debt repayment.
4.Loan Documentation Checklist
Lending organizations disclose a documentation checklist for a small business loan application, which typically includes various documents such as bank statements, personal and business credit reports, income tax returns, commercial leases, business licenses, articles of incorporation, personal background and resume.
5. Contacting Lenders
After completing all of these steps, identify financial institutions and start contacting them to initiate personal interviews. A bigger pool of prospective lenders means better chances for a successful loan application. Consider organizations affiliated with the SBA, which are typically able to provide financing at a lower cost due to U.S. government guarantees.
6. Build Personal And Business Credit Scores
Your personal credit score ranges from 300 to 850 (the higher, the better), and evaluates your ability to repay your personal debts, such as credit cards, car loans and a mortgage. The FICO score, commonly used in lending decisions, is based on five factors: your payment history (35% of your score), the amounts owed on credit cards and other debt (30%), how long you've had credit (15%), types of credit in use (10%) and recent credit inquiries (10%). Small-business lenders require a personal credit score for loan applications because they want to see how you manage debt.
7. Know The Leader's Minimum Qualification And Requirements
Meeting a lenders minimum qualifications and requirements will make you a stronger applicant. Some lenders may offer some flexibility if you're underperforming in one area but overperforming in another, but your best chance of getting approved is meeting or exceeding all of their minimums.
Borrowers typically need to meet minimum criteria related to credit scores, annual revenue and years in business. And lenders generally frown upon recent bankruptcies and other past delinquencies.
If you're looking for loans backed by the U.S. Small Business Administration, you have to meet additional SBA loan requirements. Your business must meet the SBA is size standards because these loans are only for small businesses. Borrowers typically need to have strong personal credit and business revenue, and must be current on all government loans with no past defaults. So if you've been late on a federal student loan or a government-backed mortgage, you ll be disqualified.
8. Gather Financial And Legal Documentation
Banks and other traditional lenders typically ask for a wide range of financial and legal documents during the application process. They can include:
a. Personal and business income tax returns
b. Balance sheet and income statement
c. Personal and business bank statements
d. A photo of your drivers license
e. Commercial leases
f. Business licenses
g. Articles of incorporation
h. A resume that shows relevant management or business experience
i. Financial projections if you have a limited operating history
j. These requirements can make getting a bank loan time consuming. That may not be an issue if you're in the market for a long-term business loan to finance a major investment.
However, if you need money faster, online lenders may be a better fit, as they can provide a streamlined online application process with fewer documentation requirements and faster underwriting. If you have good credit and strong business finances, some online lenders may offer you rates comparable to those for bank loans.
9. Develop a Strong Business Plan
Lenders will want to know how you plan to use the money and will want to see that you have a strong ability to repay. They may require a solid business plan that details the purpose of the loan and how you expect it to increase profits.
Your business plan should include current and projected financials, and clearly demonstrate that your business will have enough cash flow to cover ongoing business expenses and the new loan payments. This can give the lender more confidence in your business, increasing your chances at loan approval. Your business plan should include:
a. Company description
b. Product and/or service description
c. Management team
d. Industry analysis
e. Facilities and operations plan
f. Promotional, marketing and sales strategy
g. SWOT analysis (strengths, weaknesses, opportunities, threats)
10. Provide Collateral
To qualify for a small-business loan, you may have to provide collateral to back the loan. Collateral is an asset, such as equipment, real estate or inventory, that can be seized and sold by the lender if you can't make your payments. It's basically a way lenders can recover their money if your business fails.