There are two ways that most entrepreneurs start and grow their businesses. One way is to write a plan, apply for a small business loan, and open your doors. The other is to write a plan (maybe) and just open your doors. No loan required.
Well, not that easily. You’ll still need cash of course; you’ll just be using your own. Unless you apply for a small business loan. Getting approved for a loan could make things easier.
The popularity of small business loans for startups are now commonplace and beneficial in many ways. They can provide a financial cushion, help to bridge payroll cost, meet equipment or product expenditures, and other overall business expenses.
Now let’s get started.
1. When Do You Need The Loan?
Are you an established firm that needs seasonal funds to get through a slow period? Attack this issue and plan for it when things are super busy, not slow.
Will your new business launch this year? If you’re planning to start your new company sometime in the future, mulling over business loan options is not a bad idea.
Either way, you should probably fill out that business loan app now. A banker wants to see that an approval today will simply add to your business success, and not be dependent on it for your survival tomorrow.
2. How Strong Is Your Credit?
Good credit or bad credit. Can you get a small business loan with bad credit? Yes, you can. The difference is in how much you’ll pay for that loan. Of course, the stronger your credit the better the terms.
There are a host of companies that can help you improve your overall credit outlook like Credit Sesame and Credit Karma. You might also be able to improve your score by verifying the accuracy of items found on your Transunion, Equifax, and Experian reports.
Without a proven business track record, lending companies will rely on your personal credit to approve or deny your loan application. But will can change with time. Building your company’s credit, so you don’t need to depend on personal credit, is goal you should have in mind from the onset.
Over time your company (create a business profile on Dun & Bradstreet) will be able to secure loans on its own. But for now, just know where you are before you begin applying for loans so that you have a good idea which lender is best for you.
3. Know Your Lender Requirements
A surefire way to getting approved for your small business loan is knowing what your lender requires. A quick search of their website or FAQ section will give you a good idea as to what to expect from their application process.
That does not mean that if you don’t meet all the requirements that you will automatically be denied. It is just a guide. Try to avoid working with a lender that requires a personal credit score of 750 or better if you’re not there yet.
There are plenty of avenues for seed money if your credit score does not meet the lender’s minimum.
Traditional bank options maybe a good fit for well-established companies, or those that have a proven track record.
Entrepreneurs shouldn’t be discouraged if your bank doesn’t decide to approve your loan. Denial notices are not a rejection of your company, you’ll just need to find a better match for your current situation.
4. How Will The Business Loan Be Used?
The first question any small business lender will need answered is what you will be doing with the money. Are you planning to purchase inventory or equipment with your loan? Do you need the loan to hire staff and office space? Or in the case of a used car startup, do you need to buy cars.
A concise and well thought out plan for the cash will be met with positivity.
Lending companies will also want to know how long you have been in business. You will not have the best answer if you are a startup, but you can improve your outlook.
Have a snapshot prepared of a previous business venture or management job that you successfully headed up. This display of management skill—particularly as it relates to company revenue—will prove favorably.
They will want to get specific regarding your numbers. What sales volumes are you currently, and historically, been able to achieve? What are this year’s sales projections? How many contracts has your team recently been awarded?
If the horizon is not as sunny, don’t worry. A laser and detailed focus on what you have achieved in the past, as well as a list of business or personal assets, should begin tip things in your favor.
Don’t be shy. Now is the time to shout about all your marketing efforts, plans, results, increased phone inquiries, bid request, etc. By painting a clear picture that lenders can also envision, will increase the likelihood of a loan approval.
5. Organize All Your Loan Documents
Organization and great record keeping in business is mandatory for your long-term success, and it is mandatory when applying for a small business loan. Having all your documents ready to go will speed this process.
A credit report.
Financial statements that include both current and prior bank statements, balance sheets, income statements, and cash flow reports.
Articles of Incorporation and operating agreement.
Tax returns that cover the past three years.
Business license and EIN number.
Contracts or agreements with customers.
Business plan. Especially important if you are a startup and some of the aforementioned documents don’t apply to you.
A current resume maybe beneficial too. It can be presented in lieu of some docs that you simply will not have as a startup.
6. Business Loan Type
Peer-to-peer, line of credit, receivable financing, factoring, merchant cash advance, and more. Deciding which one is best will also depend on how old your business is.
If you’re starting a moving business for example, you will need equipment, vans, and maybe trucks. But if you are flipping cars you may only need some type of floor plan financing.
Peer-to-Peer or P2P lending can be a great choice if you are yet established but have decent credit. Several individuals or companies will consider backing a commercial loan if modest criteria are met.
Rates can be competitive and some even rival banks with lower terms. In addition to potentially better rates, P2P lending can lead to more networking opportunities since you are essentially borrowing from your peers.
Line of Credit. Your bank can approve a line of credit or a regular loan with terms. Go in, speak to a loan officer, or apply online and decide if their offer meets your needs.
Regular bank loans usually have tougher approval guidelines. But if you have been responsible with your personal and business credit, you’ll most likely benefit from your banking relationship with an approval letter.
Small Business Administration (SBA) loans are made by traditional banks and guaranteed by the federal government. These government loans require some degree of red tape but can have more advantages like longer repayment terms and better rates than other loan sources.
Merchant Cash Advance is relatively easy to get. Your credit card billing company will advance you a certain amount of funds –based on your average monthly billing—to be paid back a little at a time. And presto, the funds are released into your business checking account.
Usually, some type of admin or processing fee followed by terms requiring you to pay back the loan in a set amount of time with a small percentage of your future sales.
Let’s say you secured a $5,000 dollar advance for your moving business which processes $15,000 dollars in monthly revenue (with an average customer billing of $750 dollars per sale). You would have to repay $150 dollars toward that outstanding advance amount. (You’ll keep the remaining $600 dollars.)
Accounts Receivable Financing is fast and is a viable option for certain businesses. Financing of this time relies on your monthly revenue instead of your credit to decide yes or no.
If you’re having a temporary cash flow issue, this may be an option worth pursuing. Make note however, that although funding is generally fast, the rate at which these companies extend cash is not cheap and adds up in a hurry.
7. Can You Put Up Any Collateral?
To help ensure you get that loan approval notice, you may consider putting up some collateral. This will help lenders decide if your risk level is worth taking. In the example of the moving company previously mentioned, a lender may consider the fact that you own your first truck.
If you can show that a second truck will increase sales, and you are willing to put the first truck up as collateral, that may get your loan approved. If your business is growing at a consistent rate, securing your loan in this way maybe a risk worth exploring.
With strong credit, unsecured business loans can be an option as well. You wouldn’t need to secure a loan with your first truck, in this example, but your credit would need to stand firmly on its own.