Starting and maintaining a small business means a lot of work, time, and financing. But, small business owners know more than anyone that getting the business financing to keep their company going is not an easy task. Naturally, not all aspiring entrepreneurs have enough money in their back pockets to get a business up and running without a little help. The problem is: small business loans aren’t just handed out. Banks and lenders want to make sure their money is in good hands. So, taking steps to ensure your lender that you are deserving of a business loan is vital.
5 Ways To Increase Your Odds of Getting a Small Business Loan
Have a Business Loan Plan
One of the easiest ways to not get a business loan approved is by not having a plan. Banks want to see that you have proper business plan that outlines where your business is starting and where you see it going in the future. Ultimately, you want to prove to your lender that you have a clear idea of where you want your business to go, and that you have the drive to get it there. Make sure your idea is realistic and achievable within your marketplace. Your plan should also display a logical chronology of when your goals are meant to occur.
Remember that “too much detail” does not exist. The more you know, and the more your lender knows, the better. As such, make sure to outline exactly where the money from the loan is going and what it is going toward. Lenders are wary to grant a loan to someone who could potentially use the money for frivolous items and ventures. So, prove to them that there is sense in where you are allocating your loan.
Clear Up Your Own Credit History
Your personal credit history is a lender’s most significant indicator of risk. Therefore, clearing up your personal finances is the first step to getting approved for a small business loan. The better your credit score, the more likely your lender will see you as a low-risk borrower. Typically, lenders want to see a credit score of 700 or higher. If your credit is lower than 700, don’t panic yet.
Luckily, credit scores are easy to improve. By paying your bills on time and using less of your approved credit line, you’ll be able to bump up your score in just a matter of a few months. If you’ve been declined for a small business loan in the past because of your credit score, taking these steps will increase your chances for approval immensely.
Be Organized & Prepared for the Loan Application Process
In addition to having a business plan, you should also be organized and ready to answer any question your lender may have. Be able to provide any information your lender needs to approve you, including documentation and other paperwork. Arriving prepared in this manner exemplifies your efficiency and understanding of the loan process. Lenders will then assume that your responsibility and adeptness will transfer into your business practices. Also, your ability to produce this information in a timely manner shows that you are more likely pay your loan back in a similarly timely manner.
To avoid the mistake of showing up unprepared, create a checklist of the documents you’ll need. Similarly, practice answering questions that are likely to be asked, including the amount of money you’ll need, how fast you’ll need it, and the amount of collateral you have to put up for the loan. Answering these questions beforehand will also give you an idea as to which loan option would be best for you to pursue.
Have a Financing Backup Plan
Having a plan B is just as important as having a plan A. When applying for a small business loan, you want to not only have your original plan ready, but also a backup plan to show you have thought of all possibilities. First, create a primary payment plan that explicates how you intend on paying your lender over time. But, don’t just rely on this original plan; back it up with another to ensure your lender that you plan on paying back your loan.
In addition to having a backup payment plan, you should also be prepared for a second attempt. If you are not approved for a business loan after your first attempt, figure out what went wrong and fix it. Believe it or not, reasons for declined business loans are usually reparable. Whether it be lack of documentation, or a poor credit score, learn from your previous mistakes and come back to your lender with a new preparedness and proposal.
Look into Multiple Small Business Lenders
While big name banks may be easier to come by, consider looking into other options. Small, local banks are more sympathetic to small businesses because they understand the struggle of being a startup. Many large banks see small businesses as risky to lend to because of their high failure rates. As such, it is wise to approach likeminded people who are more empathetic and willing to invest in small businesses.
Similarly, explore different lenders. Don’t feel as though you need to limit yourself to one loan option. Spreading your risk across a few banks can be good, especially if your business hits financial strife. Or, consider looking into alternative lending options such as invoice factoring, a line of credit, merchant cash advances, or a government-backed loan.
Starting a small business is a process, but don’t let your need for a loan prevent you from getting started. Following these steps will get you on your way to making your dreams of creating a small business a reality. Remember: don’t get discouraged if this process takes a few tries. Make improvements where you see fit and try different lending options to become the entrepreneur you’ve always wanted to be.