Although it isn’t as easy to borrow money as it was prior to the Great Recession, lenders and banks still have a need to provide small businesses with loans. The key to obtaining a business loan is knowing how to go about it and getting the best terms.
The following is an easy 7 step process you can use to successfully get a business loan:
Step 1: Get started before you need the loan.
It is essential for you to build a good relationship with your lender before your business needs a loan. Allow the key contacts at the lender time to get to know you and your company before you ask them for anything. Keep in mind, people tend to do business with people they know, trust and like. Lenders work in the exact same way.
Step 2: Determine what you need the money for.
There are both bad and good reasons for obtaining business loans. Some of the good reasons include financing big seasonal sale variances, long-term software development, real estate, and equipment needed for your business. Sone of the bad reasons includes financing to acquire non-essential business assets, office build-outs and to cover ongoing losses.
Step 3: Determine the amount of money that is needed by your company.
Many small businesses fail to ask for a big enough loan. When you underestimate the amount of money that you need it can result in problems with having an insufficient amount of working capital earlier than what you had anticipated. If you overestimate, lenders may question your credibility and assumptions as a business owner. When you have a budget that is well thought out and has financial projects to support it (cash flow statement and profit & loss statement), it shows that research was conducted and that the budget is reasonable.
Step 4: Know what your score is.
Personal credit scores are still looked at by lenders as a way to judge how reliable the principals are who are wanting to borrow money. It is very important to be knowledgeable about what lenders are looking for and how your score lines up with their expectations.
Credit score: A 650-700 credit score is considered to be acceptable. However, it doesn’t guarantee you will be approved for a loan. A majority of lenders are looking for credit scores that are 700-800 at least.
Debt to income: Your personal debt payments should be less than 33% of your gross monthly income.
Length of time in business: Term loans and unsecured working capital lines are given by lenders to businesses that have a reliable incoming accounts receivables records and that have been operating for more than 2 years.
Industry risk report: Ratings for industry risk are based on government SIC codes, which each have a rank. You need to find out how your industry is rated for risk.
Cash flow report: The higher your operating cash margin is, the greater chance your business will have to be able to survive any slow market conditions and also ensure long-term growth and survival. Ultimately, a majority of lenders give money to a company based on its cash flow, since that measures the ability to repay the loan successfully.
Step 5: Find your lender.
Do some research on the kind of lender that will fit the best for the type of loan needs your business has.
Commercial banks: These are usually the best option for traditional loans where you meet the strict parameters that we have been discussing.
Non-bank lenders: There is a record increased number of these lenders for those wanting higher returns. You can use a website like Fundera for assistance.
Region-specific lenders: These are lenders such as local community banks with an interest in a certain industry or geography area’s economic development.
Alternative and micro lenders: There are crowdfunding websites such as IndieGoGo and Kickstarter that might be helpful for raising less than $10,000 for capital needs. Peer to peer websites such as The Lending Club and Prosper can be a good source for personal loans.
Step 6: Get your loan application package prepared.
This is the paperwork that needs to be submitted to apply for a business loan. It usually includes the following:
A business plan including the resumes of the business owners.
Financial projections and results (Cash Flow, Balance Sheet, and Profit & Loss statements).
Personal financial information, which included tax returns for three years. Keep in mind that lenders search the personal social media websites of the business owners as part of their overall research.
Step 7: Wait.
You can expect to receive a decision in two to four weeks. Each week you can check your status. Your lending institution might need additional documentation from you.