Tips for Getting a Small Business Loan

Tips for Getting a Small Business Loan

A few tips designed to help brand new small businesses. This should help you to submit the strongest application possible and improve your chances for an approval.

The bank will be looking at all or your information to determine how likely it is that the loan will be repaid. Risk is the primary factor that will determine if you will get the loan. The following information is designed to help you reduce the appearance of risk in order to obtain a favorable decision from your application.

Your Personal Finances

Personal Credit

Regardless if you are a Sole Proprietor, Corporation, LLC, etc, the bank will want to look at your personal credit. Pull your credit report and order your credit scores as well. If your credit scores are 650 or under, then it may be best to do some clean-up of your personal credit before continuing. Or, you may include a letter explaining why these occurrences happened and why it won’t happen again.

Personal Income

The lenders will want to know where your personal income will come from while you’re operating your business. Will your sole income come from the new business or will you work full or part-time while starting your business? The lenders will also want to know how you plan to transition from working for someone else to being self-employed, if that is your plan.

Personal Assets

The assets you own are very important as they may be looked at as potential collateral for the loan. Some companies can provide a business equity line of credit, which will use equity in your home as collateral, while establishing credit in the business name. The lenders also see assets as potential sources of cash to cover you in rough times.

Personal Liabilities

This is how much debt you owe, including mortgages, credit cards, loans, etc. Get your debt level down. In regards to credit card debt, a good rule of thumb is to have no more than one-third of your available credit outstanding.

The Business Plan

This is the time to really sell yourself and your business. Your plan must be complete and presented very professionally. The executive summary should comprise the first few pages and should be very professional. Recruit someone to help you if you need to. The Small Business Administration (SBA) has some sample business plans that are very helpful.

Be sure to detail what product or service the business will provide and what sets your business apart from competing businesses, how will the business make a profit and how much profit is expected per transaction, how many transactions do you expect per month. Show any demographic information you may have about the area you’ll be providing services to. (How much traffic will pass by your location? How much demand is there for your product/service? What is your target audience and what percentage of the population will your business serve?)

When projecting the revenue, profits and costs for the company, you’ll want to think at least 24 to 36 months ahead and break everything down on a monthly basis. Include your payment schedules for your lease, utility costs, loan repayment, etc. Also include a contingency plan detailing how you will handle any shortfalls that may occur for a month or longer.

Experience

Another piece of your business plan should include your experience level. How familiar are you with the industry you’ve chosen? Do you have previous ownership or management experience? Your chances are better if you have some experience working the industry you’ve chosen. If you have no related experience, add working skills that you have gained that apply to the business.

SBA Myths

The SBA provides loans to small businesses: False.

The SBA works as a guarantor of loans made by other banking institutions. If you contact their offices, they will simply offer advice on finding a lender.

Here is an example of one way they will help a small business: If you go to a bank requesting $25,000, the bank will see if they can approve the full loan amount for you. If not, they will seek to qualify you for SBA backing. One possible scenario is that the bank will cover 50% of the loan, while the SBA acts as guarantor on 40% of the loan, and you will be responsible for coming up with 10%.

The SBA will help if you have bad credit: False.

The credit requirements for SBA eligibility are the same as most banking institutions. The SBA is simply there to assist with new businesses or young businesses with very little time established.

Other Loan Options

If you are unable to obtain a business loan, be sure to ask why they declined you. Their response may provide hints to changes that can be made to your business plan. Take a step back and see what adjustments you can make, and then try another lender. Try applying at large banks and at small community banks.

If you are unable to get approved for a business loan after several attempts, you may wish to consider other loan options. Using a personal loan, such as a home equity line or loan may be helpful to get you started. Once your business is more established, then return to the lenders and show them what your business is doing.