As a newly created company with minimal income and business history, it’ll be hard (if not impossible), for you to qualify for a traditional business loan. This means that one of your top options with be a small business loan.
Since this is such an important financial decision that can make or break your business, it’s important that you know the ins and outs of small business loans. Here are 5 things you must know before applying.
- Not Just Offered by the Small Business Administration (SBA)
One misconception you may have about small business loans is that they’re only offered by the Small Business Administration (SBA). While the SBA backs these loans, you can obtain a SBA loan through a traditional bank, a credit union, and other loan brokers.
Having options is beneficial but it also means that you’ll have to do some research in ensuring you choose the right lender. The best lender should offer the most agreeable loan terms such as interest rate, fees, and other factors. Be sure to look for a lender in your local area as well as online. Sometimes online institutions offer rates and terms that brick and mortar banks can’t.
- Ensure You Qualify
Before preparing to apply for a loan, be sure that you meet the lender’s qualifications. Since there are a variety of lenders to choose from, you’ll want to do explicit research to ensure that you meet all of the requirements.
For example, to qualify for a loan through the SBA, you must not be delinquent on any other government-backed loans, such as a mortgage or student loans, and your business’ industry must be on the SBA’s eligible business list. If you run a bank or a real estate investing company, you don’t qualify for an SBA loan.
- Credit Scores Matter
Most business loans examine both personal and business credit. Personal credit scores range from 300 to 850, and the higher your credit score, the less risky you are to lenders. At a minimum, before applying for a small business loan, you want your credit score to at least be 550 or higher.
If your credit score could use some improvement, you’ll want to tackle that task before applying for a small business loan. Otherwise you decrease your risk of getting approved.
To give your credit a boost, pay down debt. The lower your debt-to-income ratio, the higher your score will be. It’s also important to pay your bills on time and ensure that you’re paying more than the minimum. As a well-rounded approach, be sure to examine your credit report to ensure that all of the information is accurate.
Lenders will also look at your business’ credit score which ranges from 0 to 100. This score is tracked by three credit bureaus including Equifax, Experian, and Dun & Bradstreet.
- A Solid Business Plan is a Must
Think like a lender here. Would you give a business thousands of dollars without having a pretty good understanding of what the business does and it’s expected future income? To ensure that a lender understands your company to a T, you’ll need to create a detailed business plan.
This plan not only helps you as a business owner, it also gives lenders the information that they need to determine if your company is worth investing in. Before submitting your business plan along with your application, be sure that it has the following information:
- Executive summary
- Business description
- Detailed information about product or service
- Market analysis
- Business strategy and implementation
- Financial plan and projections
- Information about the management team
A thorough and well-written business plan may be the driving factor in what convinces a lender to invest in your company. While writing a business plan is time consuming, it’s well-worth the added benefit of having peace of mind that a lender has a clear understanding of your business’ present and future.
- You’ll Also Need Other Documentation
Aside from your business plan, lenders will also want to see other relevant business documentation such as income statements, income tax returns (business and personal), bank statements, licenses, commercial leases, and financial projections.
As you can imagine, lenders can spend days, sometimes weeks sifting through this information. It’s worthwhile to take the time to gather all of these documents and submitting the with your loan application versus waiting until the lender asks for them.
Since the loan process can be slow, you want to be prepared from the start to speed up the process and get access to the funding you need.
Conclusion
The more knowledgeable you are about small business loans, the greater chance you have of getting approved. Be sure to thoroughly research these loans as well as the available loan programs and lenders to ensure you’re making the best decision for your startup.