While running a small business, most business owners run into a period when they consider applying for small business loans. If you’ve ever applied for a personal loan or personal credit, you have an idea of how challenging the process can be. Unfortunately, small business administration loans can be even more difficult to apply for and secure approval.
The downfall for most applicants is simply being unprepared and not having a complete grasp of loan requirements. Individuals can improve their chances of approval and shorten the entire application process by understanding the complete application process for small business loans. To help, we’ve outlined the top nine things everyone needs to know before they apply for a loan.
Benefits of a Small Business Loan
It’s essential to understand why business owners typically seek a loan. There are many ways a business can benefit from a loan, including:
- Acquiring capital during a slow sales period
- Funding the purchase of new equipment or inventory
- Help with business liquidity to continue operations
- Location expansion
- Product or service expansion
When used correctly, a small business loan can help your business grow or get through a rough period.
Nine Things to Know Before Applying for Small Business Loans
Business loans are notoriously difficult to get because the business owner needs to present a complete case for why they need the money, how they can pay it back and why they’re not a risky borrower. Before you jump straight into applying, make sure you know and consider these nine tips first.
1. Your Credit Matters
If you look up how to apply for a small business loan, you’ll notice that every guide talks about credit. Whenever you apply for any type of loan, including business loans, lenders will want to look at your credit score.
Most commonly, your lender will review both your personal and your business credit scores. These scores help lenders determine whether you’re a low-risk borrower with a good track record or you have a history of bad borrowing patterns.
Your credit score greatly impacts whether you’ll get approved for a loan, as well as the terms of your loan. Individuals with strong credit scores generally receive a lower interest rate and better loan terms.
If you know your credit score isn’t great, you may want to hold off on applying for a small business loan while you work on improving it. You can improve your credit by paying down debts, improving your credit utilization ratio and making timely payments. However, if you need the loan right away, the good news is that a poor credit score doesn’t necessarily mean a loan denial (see tip nine).
2. Understand the Impact of Hard Inquiries
To check your credit, lenders have to pull a hard inquiry. A hard inquiry gives the lender more detailed information about your credit, including debts owed and payment history, as well as previous loan denials. While a hard inquiry might be necessary to get approval on a small business loan, it’s imperative to limit the number of total inquiries.
Every time a lender pulls a hard inquiry into your credit, your credit score takes a minor dip. If you’ve only had one inquiry, the dip will be minimal, and your credit score will bounce back. However, if you’re applying for several small business loans all at once, each lender pulling a hard inquiry can have negative consequences. These back-to-back pulls can drastically pull your credit score down, and you’ll start to look like a risky borrower, which can result in more difficulties securing a loan.
Don’t worry — it’s possible to shop for lenders and avoid multiple hard inquiries. Lenders always have to ask for your permission to pull a hard inquiry, so you’ll know when it happens. You can ask prospective lenders to give you a preapproval based on a soft inquiry, which won’t impact your credit score. Once you determine the best offer from all lenders, you can allow your first choice to pull a single hard inquiry.
3. You’ll Need to Provide a Business Plan
You can’t apply for any small business loans without providing the lender with your business plan. Your business plan helps the lender determine the likelihood of your business succeeding over the long term, so they can assess whether you’ll be able to pay it back.
Your lender won’t help you make a business plan. You’ll have to do your research beforehand, create the plan and apply for the loan with your business plan fully ready to hand over.
Your business plan should include:
Executive Summary: This is a one- to two-page summary that convinces the lender that your business is worthy of a loan.
Company Description: This should include important company details, including the legal business name, owners’ names, license and certification numbers, number of years in operation and more.
Market Plan & Analysis: Provide a clear analysis of the current competitive market and where your product or service stands within that market. Your market plan and analysis should answer questions like:
- How much market share is there to gain?
- What’s the projected five- and 10-year growth for the market?
- What’s your competitive advantage?
- Who are your main competitors?
Organizational Plan: Provide details about all the employees you have on staff.
Service or Product Description: Describe your product or service, including what makes it great and different from the competition.
Marketing and Sales Plans: This provides the lender with information about your marketing efforts from the past and plans for the future. You’ll also want to include details on how sales have been performing over the last five years or so.
Financial Analysis: This should include relevant financial details, including a five-year revenue and profit projection.
Funding Request: Request a specific amount and explain why that money is needed, how it will be used and how you’ll pay it back.
The more thorough and detailed your business plan is, the more likely you’ll get a quick decision on your loan application. If your business plan is missing information, the lender will have to ask you to provide it, which can delay the entire process. If you’re a business owner who needs capital soon, these delays can be incredibly detrimental.
4. Prepare All Your Financial Documents Beforehand
Before you fill out any applications for small business loans, get all your financial documents ready. Your lender can’t take your word for how your business is performing; they’ll want to see years of financial records. The financial documents you’ll need to gather are:
- Balance sheets
- Cash flow statements
- Capital expenditure budgets
- Financial metrics for your industry (optional)
- Income statements
- Profit and loss statements (optional)
Ideally, you want to provide the last five years for all the above documents, but some lenders will accept three years’ worth of statements.
You’ll also want to review these financial documents as you create your business plan. These statements can help you understand the health of your business, how much money you truly need and how soon you’ll be able to pay it back.
5. It’s Best to Have a Repayment Plan
You don’t technically need to provide a repayment plan in your business plan, but it’s highly encouraged that you do so. A repayment plan shows the lender that you’re forward-thinking, can afford the loan you’re asking for and have already put some thought into how you’ll pay it back. The repayment plan should clearly show where the money will come from (based on projections for the business) while still leaving room for error if your forecasts are slightly off.
If you can’t build a reasonable repayment plan without being stretched too thin, it might be a sign that you’re asking for too big of a loan.
6. Be Prepared to Personally Guarantee Your Loan
A lot of small business loans are given out on the condition that the borrower personally guarantees the loan. This guarantee means that the loan will remain outstanding with the owner, even if the business fails. You may also have to pledge personal assets as collateral, such as your home, vehicle or other assets. Many institutions expect this to reduce their risk in lending.
7. Know How Much to Ask For
Every part of the business loan application is thorough and detailed, including the amount of money you’re asking for. You can’t go to a lender for an arbitrary amount that simply feels right. Instead, your business plan needs to clearly explain why you’re asking for a specific amount. For example:
- If you need the money for equipment, you’ll need to provide estimated costs from the suppliers you intend to purchase from.
- If you need the money to cash flow a slow period, you can showcase how long the idle period usually lasts and how much your monthly expenses are based on your previous financial statements.
- If you need the money to expand into a new product, you can show how much your initial product launch will cost.
The lender wants to see that you have a thought-out plan and understand what the money will be used for. Include a detailed explanation of why you need that specific sum in your business plan.
8. Understand the Loan Terms
If you’re particularly excited or desperate for a business loan, you might feel like applying to every lender. In reality, you need to do some careful research into every loan and the terms offered. Make sure you know about and understand:
- Any fees and consequences for late payments, missed payments, etc.
- Any penalties for early repayment
- How much interest you’ll pay over the life of the loan
- The length of the loan
- And more
Review the fine print before you accept and sign off on any loan.
9. Explore Your Lender Options
There are more loan options out there for everything, including for small business loans, than ever before. If you find you’re not getting approved at a traditional bank, consider looking at other lender options. Many lenders are willing to work with people who have poor credit, don’t have five years of business operations or can’t secure their loan with assets.
Exploring your lender options also ensures that you’ll find the best fit for your business. Often, these nontraditional lenders, such as online lenders, can offer more competitive rates and flexible approvals because they don’t have to shoulder the costs of a physical location. As a result, they pass these cost-savings on to their clients.
Don’t go for the first lender you find. Instead, research small business loan vendors to find one that works for you.
Lendzi Can Help You Secure Your Small Business Loan
Most small business owners are too busy to sit around and look at all their lending options. Luckily, Lendzi can help. Lendzi helps small business owners secure capital with as little friction as possible. You simply fill out one application, and Lendzi reviews over 60 lending partners on your behalf. We’ll find the lender that fits your needs and can offer you the best terms and rates. The process doesn’t have to be complicated. Fill out an application with Lendzi today.