Keep Your Documentation Ducks In a Row
The key to getting a small business loan is that you successfully demonstrate to the potential lender that you will be an exemplary borrower who will pay on time and never cause any problems. The first step toward accomplishing this is to show lenders that your financial, tax and accounting records are current, readily available and in order. If you are not a math genius or record-keeping is not your strong point, consider hiring an accountant. Although this may go against your instincts for frugality, the accuracy and organization this addition to your payroll provides is priceless.
Keep a Sharp Eye On Your Credit
Depending on your lender, credit requirements may vary, but one thing is for sure: All of them will want documentation that you are a good credit risk. Some of the most effective ways to keep your credit score within acceptable range is to avoid bankruptcies, foreclosures and late payments. More than the occasional customer chargeback can also make a dent in your credit, so do everything you can in terms of good business practices to be proactive and maintain productive relationships with your customers.
In addition, avoid the temptation to apply for several loans at the same time. Every time a lender does a “hard pull” to find out your credit score, a few points are temporarily taken off. You have worked hard to get your score where it is now, so don’t compromise it with over-aggressive loan applying.
Do Your Homework
While it may be clear to you that you need money and you have probably calculated the minimum and maximum amounts you want to borrow, you must also carefully look into what type of loan you want to get. That is because some require a good deal more paperwork and documentation than others. For instance, there is a huge difference between what you will need to present in your application for a Small Business Administration (SBA) loan and a simple line of credit. Furthermore, approval times, fees and interest rates can differ drastically, particularly between small business loans from conventional banks and those from nontraditional lenders.
Make Your Case
As we said above, your task in applying for a loan is to demonstrate to the lender that you will make your monthly loan payments consistently and on time. If your company already has a history, lenders will ask to see past tax returns and documentation that discloses your current debt. On the other hand, if this is a new company or you have just purchased it, your job during the application process will be to present information that convinces the lender that you will have sufficient cash flow to cover your loan payments. Keep in mind that this may require you to disclose your personal credit information and personally guarantee the loan. In effect, that means that if your business goes under, the lender can come after you to pay off the loan from your own funds.
It is important that you carefully review all of your options before signing on the dotted line with any of them. After all, this will be a long-term relationship, and you will need to live with it probably for years. As you will soon discover, there are numerous lenders in the marketplace: large banks, small banks and nontraditional enterprises funded by private investors. Big banks often have large staffs and more substantial pots of money for loans, but they may prefer to work with bigger companies than yours. Small or local banks may have fewer resources but may be easier to establish a long-term relationship with. Nontraditional lenders may be your best choice if you have poor credit but sufficient cash flow to make the higher payments they usually demand.
In the end, applying for a small business loan requires organization, attention to detail, willingness to get help from professionals if you need it and thorough investigation of all of your options. If you take the process one step at a time, you will find that you can get the capital you need at terms that work for your new or existing small business.