The first or even third time you apply for a small business loan can be a harrowing experience. This is especially true for first-time business owners who may not know exactly what they are getting into. It’s very important to know what you will be faced with when you apply for a loan before you actually apply. There are a number of factors that will affect the loan process, and some of these factors can be worked on beforehand.
Before you fill out that small business loan application, know what kind of financing you will need. Many business owners need a loan from an actual lender, while others can make due with a business credit card. You should always be prepared with facts about each avenue before you make the final decision concerning your finances.
Credit History- The First Step
A lender, whether it is a personal lender or a business credit card company, is going to look into your past credit history to ensure you have a history of paying your bills. After all, no lender is going to want to lend you money if you have a history of skipping out on your financial obligations. A credit report is what will tell a lender if you are a good match for their type of loan. Your score will give them a jumping point for the loan. Additionally, even if you have good enough credit to be approved for a business loan or credit card, the score will also affect the various loan terms once you receive it. Improving your credit history before you apply for a business loan is the best possible course of action.
Personal Credit Scores
Too many business owners do not realize that their personal credit score matters to lenders. Your past and current credit history will show lenders whether or not you are the right fit for a loan. Paying your bills on time, especially paying more than the monthly minimum, will give you a better chance of securing the loan you want. Lenders do look at your personal scores, so make sure you keep that number as high as you possibly can.
Business Credit Scores
It is important to keep your business and personal credit scores separate. This is sometimes easier said than done, especially for first-time business owners. The problem occurs when the person then tries to apply for a business loan. Even though a lender will look at your personal credit history, it does not hurt to keep things separate, especially when it comes to taxes. Again, keep your business bills paid in order to put yourself in a better financial position to receive a loan when you need one.
Your Credit Score
You can access your credit report for free, thanks to the Fair Credit Reporting Act. Don’t let surprises on your report hinder you from getting a business loan when you desperately need one. There are many websites that offer free reports, such as freecreditreport.com and Credit Karma. Knowing your score will give you the incentive to fix any credit problems which will hopefully improve your chances of a business loan.
Tips on fixing your credit score:
Check for errors- Did you pay a creditor off years ago, yet it is still listed as unpaid? Contact the creditor to remove any errors you find on the report.
Take care of debts now- It’s never too late to pay off your creditors. Taking care of your past-due debts will increase your score.
Pay your tax liens- If you are dealing with any tax liens on your report, pay them off as soon as you can. You can usually apply for a payment plan, but if you can pay them off in full, even better.
Remember, it is important to fix your past credit problems in order to improve your credit score. But don’t stop there- continuing to pay your bills on time will keep your credit score where you need it to be.
Explaining Your Loan Request
You’ve fixed your credit- now what? Hopefully, you are all ready to apply for the actual business loan. There is another step to take before you talk to a lender, and that is drafting a business budget. For example, are you planning to ask for $100,000? First, write down everything you plan to do with the money once you are approved for the loan. If you will be spending it on all new equipment for say; your restaurant, get estimates on each piece and labor costs. You’ll want to show the lender exactly what your plans are for the money. Don’t worry about being exact with your figures, but it is a good idea to be in the ballpark.
Prepare the Appropriate Financial Statements
Now it’s time to prepare your financial statements for the lender. You’ll want to have current copies of your:
•Cash Flow Statement
Having the proper financial statements allows you to answer the questions the lender will no doubt ask. They will want to know where you are getting the money to run your business right now, how much it typically costs to keep your business up and running, and whether or not your business is making a profit.
If you are currently struggling, make sure you have a solid plan that will showcase your goals and ideas. You want the lender to see that you know what can be done to improve your business and bring in money.
Preparing the Right Documents
Most business loan lenders will want to see the following documents before they consider you a candidate for their loan:
Financial Statements- A lender will want to see your balance sheet and income statement for the past two years you have been in business
Accounts Payable and Receivable- Prepare a breakdown of the money that your business owes and what is owed
Tax Returns- Most lenders will want to see your past tax returns, up to two years back
Your Offer is Ready
Now that you have an offer for a loan, remember that there will be an interest rate you will be responsible for. Every year, the lender will charge you for a percentage that is based on the principal loan amount. Make sure to budget this into your future financial plan.