Applying for a small business loan for the first time can be a stressful experience. It is important to prepare yourself beforehand so that you know exactly what you are getting into before you actually apply. Let’s look at the facts concerning small business loans in order to prepare you for what is to come.
Before You Begin
You will want to understand what you actually need before you apply for a small business loan. If you absolutely need financing, you will need to figure out whether you need a small business loan, business credit card, angel investment, or invoice financing or factoring. You will want to know the pros and cons of each option in order to find the best financing available for your situation.
Consider Your Credit History
Any lender will want to know whether or not they can trust you with a loan. That is where your credit history will come into play. Your personal and business credit score will have a major effect on whether or not a lender will give you the loan you are asking for. Your score will also affect the different terms of the loan if you are granted one. It’s important that you understand your credit score and improve on it if you have to. Do this first, as the better your credit score is now, the better chance of being approved for a business loan later.
Business Credit Scores
Many small business owners mix up their business and personal finances, especially when they first get started. The problem occurs later when it is time to file their taxes or apply for their own small business loan. Separating your personal and business accounts from the start is generally recommended for any new business. As your business grows, your business credit report does, too. The best way to build a great credit score for every system is to keep your bills caught up.
Personal Credit Scores
While you may have a great business credit score, your personal one often matters to lenders, as well. Your past history of payments is the most important factor when it comes to your personal score. If you consistently pay your bills on time, your score will improve. Remember, you don’t want to keep a high outstanding balance on your bills, even if you do make payments every month. Pay more per month to lower your balance- this will help increase your score.
Improving Your Credit Score
The Fair Credit Reporting Act has made access to all of our credit reports free. It is important to utilize this information. Accessing this information, through websites such as Credit Karma and freecreditreport.com, will provide you with the knowledge you need to fix any problems and improve your score.
Fixing your credit score:
Look for any errors in the reports- Check into negative activity that you have already taken care of and report any errors you find.
Check for past-due debts- Take care of any past due debts you have as quickly as possible. Pay down your credit card debt, as well.
Pay off tax liens- Talk to the appropriate government agency about any state or federal tax liens you may have. If you can, pay them off in full or ask for a payment plan.
Remember, fixing these particular problems will help get your credit score up, but you have to apply these good habits to the rest of your debts and responsibilities. You’ll then be able to enjoy a good rate on future loans.
Be Specific in Your Loan Request
When you are ready to actually apply for a business loan, start off by drafting a budget that utilizes the funds you are hoping to receive. For example, if you need the funds for a new addition to a building, get an estimate in writing for how much materials and labor costs will be. You will then want to project how much revenue the new addition will bring you after it is built. Do this for everything you plan to use the money for. You don’t have to be exact on the numbers, but you should have a general idea of how much things will cost.
Look at Your Financial Statements
You’ll want to prepare any financial statements you have from the last couple of years before applying for a business loan:
•Cash Flow Statement
Having these financial statements at your disposal will allow you to answer questions from the lender, such as:
•Where is your money coming from?
•What costs the most to keep your business running?
•Are you making a profit?
If you have to answer no to #3, that’s okay. Just have a solid plan as to how you are going to start making a profit and how the loan will help you. When you understand your strengths and weaknesses, you will be able to make a stronger case to the lender.
Prepare Your Documents
You should now be prepared to apply for your small business loan.
Most lenders will ask you to provide the following documents:
•Accounts Payable and Receivable
•Tax returns for the past two years
Understanding the Offer You Receive
Your loan application has landed you an offer- now what? The offer comes with an interest rate and APR, both of which have been based on your credit score. Understanding the difference is important.
The lender will charge you a percentage of whatever the principal amount of your loan is. An APR, or annual percentage rate, represents the yearly average of all service charges and fees you are responsible for.