5 Tips for Getting a Small Business Loan
Few entrepreneurs have the capital they need to get their budding businesses off the ground, and at some point, most will need to a small business loan. Securing a loan can be a challenge, and although banks are generally eager to lend the money, lenders often set very stringent standards that must be met.
Fortunately, having your ducks in a row when you walk into the bank can show the lender that you are a trustworthy borrower who will be able to pay the loan back on time. Here are five tips to help you get a small business loan.
1. Look Locally
While a national bank may seem like the way to go when shopping for the right loan for your business, obtaining a loan through one may be significantly more difficult. Especially if your business is young and you’re not able to show at least a couple years of profitability, or you lack sufficient collateral to secure a loan, a national lender may not even give you the opportunity to plead your case. Instead, visit a community bank and talk to a loan officer one-on-one about your business’s needs.
2. Be Prepared
As the old adage goes, “Failing to plan is planning to fail.” An ill-prepared prospective borrower is a red flag for lenders, so before you walk into the bank, ensure that you are fully organized and prepared. Have your financial, accounting, and tax records accurate and up-to-date, and consider hiring an accountant to handle the bookkeeping. Do you research and know what type of loan would fit your needs, and be prepared to give a detailed outline of how the money will be used.
3. Deal with Credit Issues
While you consider your personal financial history and your business’s finances to be two entirely separate things, the fact is that most lenders will require you to personally guarantee your business loan unless your business has sufficient collateral. If your credit history is spotty, then you may have a difficult time securing a business loan. Give your credit score a boost by focusing on paying your personal bills on time and using a lower percentage of your available credit.
4. Demonstrate Sufficient Cash Flow
When deciding whether or not to give your business a loan, your lender evaluates how risky you are as a borrower; that is, whether or not you’ll be able to make the monthly loan payments. To do this, they’ll examine past tax returns and current debt if your business is established. If you’re purchasing a business or starting one from the ground up, then you should be able to produce detailed financial projections to show how you’ll repay the loan.
5. Justify Your Request for a Loan
One of the most basic errors that business owners make when trying to get a loan is that they neglect to outlining why the money is needed. The lender will want to know why you’re seeking a loan; whether it’s because you’re in a fast-growing industry, you’re partnering with a major retailer, or you’ve fallen on hard times and need a loan to keep the lights on, your reason for wanting the loan will have a large impact on whether or not you get it.
Securing a small business loan can be a lengthy, and at times, challenging, process, but by taking the time to ensure that you are organized and well-prepared, you can increase your chances of getting the money that you need.