Are you looking at getting your first small business loan? It can be intimidating — lenders don’t give out loans to just anyone, after all. You’ll have to prove that your business is worth investing in, and how can you do that?
Well, you have to produce a business plan that shows lenders you have substantial revenue and a solid plan for the loan money. You’ll need to provide accurate financial records and have a strong credit score. It can help to talk to multiple lenders and compare multiple loan products. Follow these dos and don’ts to get the loan your business needs.
Do Create a Business Plan
A strong business plan may be the most important part of your loan application. A business plan should include detailed information about your company, including its structure and finances. Lenders need to know what your revenues and expenses are. They want to know what your goals are for your business, and what you plan to do to reach them. They may also require you to submit a loan proposal, detailing how you plan to use the money you’re borrowing to further your business goals.
Don’t Miscalculate Your Expenses
It’s important to include an accurate accounting of your expenses when presenting your business financial information to a lender. No matter how meticulous you are in calculating your expenses, there are going to be things you miss. It’s a good idea to go back over your expenses and add another 25 to 50 percent to the budget to account for those missed expenses.
Do Repair Your Credit
Your personal credit score will matter when it comes to getting many small business loans, so do whatever you need to do to repair your personal credit. Pay off debts to get your credit utilization ratio below 30 percent. Pay your bills on time. Keep older credit accounts open, as they increase the length of your credit history.
You can improve your business credit score by paying your bills early — Dun & Bradstreet only gives perfect ratings to businesses that pay their bills early, not just on time. Get a business credit card and use it regularly to improve your business credit.
Don’t Exaggerate Your Income
It’s easy to overestimate your projected income, especially if you’re getting a loan to start a small business (as opposed to getting one to grow an existing business). A new business’s first year of income is almost never as high as projected. Take 25 to 50 percent off your projected first year of income in order to make it more accurate.
Do Back Up Your Numbers
Create a realistic budget based on your new revenue projections. Many small business owners forget to provide real experience and research to back up their budgetary calculations. Show why customers are choosing you over the competition. Show that you know how to make a profit in your industry and that you have a concrete and workable plan to make it happen.
Don’t Just Talk to One Lender
You wouldn’t talk to just one lender if you were getting a loan in your personal life, like a home loan, for example. You shouldn’t just go with the first lender you talk to when you’re getting a business loan, either. Different lenders may offer different terms and rates, and even different loan products. You’ll want to get an idea of what loan products different lenders in your area offer, and what the repayment terms are, before you decide on a product and lender.
For example, you may be very qualified and want to get a traditional bank loan to fund an expansion or the purchase of some new equipment. You should shop around for the best rates. Or maybe you’re less qualified or need money faster. You should shop around to online lenders to see what products you can get — whether a line of credit, business credit card, or a loan — and decide which lender and product is best for your financial situation and needs.
Do Get Your Paperwork in Order
Getting a small business loan can require a lot of paperwork, especially if you’re going with a traditional bank loan or Small Business Administration (SBA) loan. You’ll need business bank statements and financial records, personal and business tax records, and often personal financial information and bank statements. Of course, you’ll also need your business plan, business license, resume, and proof that you own collateral, if your lender requires it.
It’s a lot easier to get a small business loan when you educate yourself first about the requirements. Make sure you know what to do and what not to do, so you can get the right loan for your business needs.
