According to statistics, in 2015 there were 3.6M small businesses in the United States reporting five or fewer employees. As you can imagine, this means there are a lot of small company owners who have decided to forge their own path in the business world.
Being an entrepreneur or small business owner takes perseverance, planning, and the ability to adapt quickly to changes while meeting all of your business and financial responsibilities. Being able to manage cash flow is critical to the survival of your company.
Regardless of whether your company is navigating through a slow period or experiencing growing pains from increased demand, small business loans offer a solution for developing and expanding companies.
If you’re thinking about getting a small business loan to help fund the future of your company, here are some tips to help you get prepared for the process.
Have a business plan for lenders to review – When applying for a conventional bank loan or line of credit, the loan officer and bank will want to know exactly how much money you want to borrow and how you plan on spending these funds. Before speaking with potential lenders, you should know how to answer these (and other) questions about your business model. Loan officers are likely to ask potential borrowers about their credit score, what their monthly operating expenses are, gross and net revenues, what the money will get used for, and whether there is collateral available to back the loan.
What lenders are looking for
Many lenders prefer to work with borrowers who have a higher credit score. This is one of the first things that gets reviewed when evaluating a small business loan application. Further, a higher credit score will help borrowers secure loans and other related financial services with more favorable rates and terms.
Typically, credit scores over 700 are considered good. Anything over 800 is an excellent credit score. If your credit scores come up short of these targets, you may still qualify for a loan. However, the rates and terms are likely to be less favorable than what you would get if you had a better credit score.
Don’t mix business and personal expenses
A big mistake that many small business owners make is mixing personal and business expenditures. Ideally, you want to keep the funds you spend on your company separate from your personal expenses. By doing so, you’re taking steps to protect your personal credit score while you are establishing your corporate credit profile.
Here are tips to help align your company for small business loan approvals.
Avoid running up balances on mixed purposes – When you’re mixing business and personal expenses, it doesn’t take much to max out your credit lines. Maintaining high balances on credit cards and other credit lines are warnings to potential lenders. Since these accounts are already at the high end of their limits, they might be reluctant to lend fresh capital.
If you have high balances in use, make an effort to reduce the outstanding balances. Using a strategy, such as paying down the credit card with the highest interest rate or paying off a card with the lowest balance is helpful for reducing your debt is a surefire way to restore your credit score.
Don’t fill out a bunch of credit applications at the same time – Always keep in mind that whenever you apply for a credit card or a loan, this results in a hard inquiry on your credit report. If you fill out applications for ten different credit products, each vendor will pull a ‘hard inquiry’ on your report. Having too many recent hard inquiries on your credit report lowers your score. Not to mention the odds of getting approved for these loans also decreases. Potential lenders are likely to view the flurry of activity as an indicator that you’re not using your existing credit lines responsibly, so you’re seeking new credit in the absence of available credit on existing credit lines. In many cases, this is detrimental.
Review your credit report regularly – Unfortunately, errors and mistakes happen. Erroneous entries listed on your credit report can result in a lower credit score. Be sure review your credit report annually to detect wrong entries, as well as take action to correct negative marks on your statement. If you see tax liens, accounts that are past due, or collection accounts get in touch with the creditor to handle these outstanding debts and get them removed from your report. By making sure that your report is accurate and up to date, you are doing what you can to keep your credit report – and the corresponding score – in tip-top shape.
Lenders like to see that their small business borrowers have the capacity to pay back the money they borrow. If while reviewing your credit report you notice inactive or low-balance accounts, resist the urge to shut down these credit lines. The low or no balances on these lines helps by showing you have credit lines open that aren’t in full use. Additionally, if they report every month as ‘paid as agreed,’ they help build your payment history. By managing a combination of credit types, including credit cards and installment loans, you are showing creditors that you take your financial agreements seriously and you won’t default on the loan or credit line.
Get the best rates and terms on your small business loan
If you want to qualify for the best terms and rates available to small business owners, cleaning up your credit ahead of your application is a smart idea. There is no reason to face the embarrassment and disappointment of a declined loan when you go into the process with an understanding of what lenders want in their borrowers – a long history and solid track record of on-time payments. The actions you take today are the ones that can help get you ahead for tomorrow.