Applying for a small business loan has always been a hassle, but with the world economy still floundering and credit still tight, the process in recent years has become a full-on nightmare.
The good news is that, while lending is still slow, it’s picking up; and with both the government and big banks pushing initiatives to boost small businesses, now may actually be a good time to apply for the funding your business needs.
So, how do you get your application approved?
There are a few things every small business owner should do to prepare for success before they start looking for a loan.
Clean up your credit report.
Before you apply for any funding, you should request a copy of your personal and business credit reports and do a thorough review.
Check for any misinformation or reporting errors, and clear up any mistakes that may be harmful before you start your application process.
Even seemingly innocent details like a misspelled name or an address you can’t remember ever living at may indicate potential fraud or other problems; so be sure to follow up on any discrepancies.
If there’s an error in the information reported from a creditor, it’s often easier to go to the company that made the report directly and discuss the situation with them before turning to the reporting agency.
One instance might be the report of a late payment on a credit card that you’re sure you paid on time. Rectifying errors promptly before you start applying for loans will make the road ahead much smoother.
Prepare a killer business plan.
Researching and drawing up a business plan can be tedious, but a well-thought-out plan is essential for a winning loan application.
It’s an opportunity to flaunt your experience and qualifications, and an excellent exercise in self-reflection and meticulous planning for every business owner.
Your business plan should include extensive market analysis and specific income, expense, and cash-flow projections that will stand up to scrutiny.
In the funding request section of your business plan, give details of exactly where each dollar of the loan will be going, and prioritize the uses to which you’ll be applying the funds.
Even if you aren’t approved for the full amount you requested, you may be approved for enough to fund your most important projects. This also helps you make sure you aren’t applying for funds you don’t need.
Businesses often overestimate their funding needs, which can lead to unnecessary loan rejections or interest charges that could have been avoided.
Know what you have to offer.
Most lenders don’t want to be the only party taking on risk. They want to know that you’re also investing in yourself.
Many small business owners dip into personal savings, 401(k)s, or a home equity line of credit to get their businesses off the ground.
You should also prepare a collateral document itemizing which business assets you have that can be used as collateral. This can include personal assets like your house, car, or even a college fund.
Business assets might include property owned by the business, such as real estate, vehicles, or inventory. Having adequate collateral to back up your loan will make it much easier for a lender to say “yes” to you.
Find the right lender.
Finally, once you have your application materials in order, you should take the time to research different your lending options.
Big banks are an obvious option, but their approval rates can be much lower than for often-overlooked alternatives such as small, local banks or credit unions. This is partly because they attract more applicants. But be prepared for a potentially less personal and less flexible approach.
Big banks rely on automated methods to sort through the high volume of applications they receive, so rigid numbers like credit scores play a major role and you could end up rejected before anyone’s even glanced at your business plan.
Lenders can also differ in their specialties or the services they provide.
If you have a favorable relationship with a bank, they are more likely to approve you. Some lenders may specialize in SBA loans or have initiatives to encourage certain types of businesses with favorable rates.
Researching which lenders are most likely to take an interest in your business, or using a service that matches you with appropriate lenders, can save you time, money, and the disappointment of rejection.
Ked Harley is a writer and researcher for Biz2Credit Business Loans, a leading credit marketplace connecting small- and medium-sized businesses with small business loans, service providers, and complementary business tools. She is also a self-confessed coffee addict working out of New York City. Her interests include business and finance, world news, food, and travel, and she enjoys yoga and running in the park. Follow Biz2Credit on Twitter for small business news and updates.