IF you’re attempting to get your very first small business loan, there are certain facts of which you should be aware prior to applying for a small business loan. Getting a business loan is a big step and not something you want to mess up because you weren’t adequately prepared. Here are some steps you may want to take to ensure the small business loan application process is as easy and stress-free as possible.
Is it Your Best Option?
If you’re a small startup company, a small business loan probably sounds like your best option because you’ll be getting the finances you need to get started and keep running for a while. However, are you sure it’s the only or even best option for you and the business? There are other financial options you may want to consider.
• Business credit card
• Using a 401K
• Angel investing
• Private Investment Company
• Government grants
Research all your options and see which one offers you the best financial assistance at the best price. Do the pros and cons of each. If it still appears that a small business loan is what you need and want, here are some tips to guide you through the process.
All lenders are not created equal regardless of what they tell you. If you were buying a home, you probably wouldn’t go with the first lender you visited. You’d talk to people and do some research on which banks offer the best deal. Do the same with your small business loans. Speak with other small business owners, visit your local government agencies and research online. Once you’re completed your research, visit a few lenders and see what they have to offer in the way of small business loans and learn what they charge in interest and loan/service fees.
Know Your Credit
This step cannot be overemphasized. Although most people have a general idea of what their credit scores are like, they don’t actually know for sure unless they’ve recently accessed a copy of their credit report. This is one of the first things you want to do BEFORE you apply for your small business loan, because you can bet it’s the first thing the lender will do when you apply for the loan.
If there are any errors on your report that could affect your ability to be approved for your small business loan, it’s better that you learn this before seeing the lender rather than after. Some common errors include wrong personal information, paid off accounts still listed as unpaid, collections not listed as satisfied and wrong balances. Take advantage of your ability to access a free credit report annually. Your credit scores are determined by the following factors.
• 35% is based on your payment history ( if you pay bills on time
• 30% is based on total debt or credit utilization (how much of your available credit you’ve used)
• 15% is based on credit history (how long you had accounts)
• 10% is based on any new credit (any new inquiries)
• 10% is based on your type of credit (installments, credit cards, mortgages)
One thing to keep in mind is that different reporting agencies put more emphasis on different factors. One agency may put a lot of importance on your payment history while another may only notice if there are bills in collections or in judgement.
Personal Credit Scores vs. Business Credit Scores
Be sure to keep your business credit separate from your personal credit. A business owner could have a perfect business credit but have it affected if a family member was late on a couple of credit card payments. Since your credit utilization can affect scores, you don’t want any personal accounts spilling over onto your business accounts.
When accessing your credit report, you can get copies of your business credit report from Nav or CreditSignal.comor Dun & Bradstreet. Copies of your personal credit report can be accessed from FreeCreditReport.com, Annual CreditReport.com or Credit Karma. If you have been mixing business and personal accounts, separate them as soon as possible.
How to Improve Credit Scores Prior to Applying for the Loan
If you do find errors on your credit report, all is not lost because the errors can be corrected. If the error is related to your personal information, you can contact the credit reporting agency or access them online and provide them with the correct information. If the error has to do with an account, contact the credit reporting agency that listed the error and the creditor. The corrections should show up within 30 days.
Monitor your account to make sure the corrections are made. If you discover that you actually do have some debts that you were unaware of or thought were paid, you can still fix this by paying the debts. If you pay all your debts on time, your credit scores will improve. Small unpaid accounts should be paid off if possible. Do not close accounts once they’re paid. It looks better to have free accounts with available credit that is not being used.
Know Your Needs
Prior to visiting the lender, make sure you know exactly what you want in the way of financing and why you need the money. Prepare a business plan and income statement showing what you anticipate for expenses, income and profit. The lender wants to know that you’re confident in your business savvy and can display this information to them.
Prepare Financial Documentation
When applying for a small business loan, you’ll need to provide the lender with financial documents as well as the application. They want to know what you earn, what you anticipate you’ll earn, amount of expenses and potential profit. In short, they want to know that you’ll be good risk. Expect to bring the following documents.
• Financial statement
• Income sheet or Profit and Loss statement
• Accounts payable and Accounts receivable forms
• Balance statement
• Cash flow statement
• Tax returns for previous two years
Understand the Offer
Once you’ve provided the lender with a complete application and the required financial documentation, the lender will come to a decision. In most cases, they will make you a loan offer based on the information you’ve provided to them and on what they feel is the best offer. Look over the interest rates and APR to make sure they’re what you’d expect, keeping in mind that they are not the same. While the interest rate is the annual percentage rate they’re charging on the loan, the APR is the interest plus the lender’s service fees. Read the fine print and make sure you fully understand all the loan terms.