Open for business. These three words cause a flutter in the hearts of many people who dream of opening their own business. This dream can certainly become a reality once the hurdle of the small business loan application is cleared. While the process may seem daunting, we found three best practices that can help you secure a small business loan and move your dream from applied for to application approved:
- Decide why the company needs money and how much. There are many valid reasons why a business will need money. Some of these include product expansion, real estate and equipment. Bad reasons to consider a loan are to cover ongoing losses, purchasing non-essential equipment and office remodeling. While lenders may be eager to provide loans, they will only do so for reasons that make good business sense. Once you have decided why you need the money, decide how much you will need. Many small businesses make the mistake of not asking for enough money. Another mistake some small businesses make is to overestimate how much money is actually needed. Overestimating can cause lenders to question the business’ credibility. To strike the right balance in the amount asked for, have a well-thought out budget with projections that include costs and expected returns.
Know your numbers. Lenders will look at the business and its principals as a way to determine how sound of an investment the loan will be. Understand what they are looking at so you can address any questions that may arise:
- Credit Score: A credit score of above 650-700 is considered acceptable, but does not guarantee a loan. Most lenders will look for a credit score that is at least in the 700-800 range.
- Debt to Income: Personal debt payments should not be more than 33% of gross monthly income.
- Time in Business: Lenders give unsecured working capital lines and term loans to businesses which are over 2 years old and have a reliable record of incoming accounts receivables.
- Report on industry risk: Industry risk is rated based on the government SIC codes which are ranked. A small business owner needs to find out how their industry is rated.
- Report on cash flow: The higher the operating cash margin, the better the chance is for a business to survive slower market conditions and ensure long term survival and growth. In the final analysis, most lenders give money based on the company’s cash flow since it measures the ability to successfully repay the loan.
Prepare your documents. You will need to put together a loan package for your lender. This package should include:
- A business plan. The business plan lays out your vision, identifies the business structure and objectives. More than that, the business plan shows lenders that you are serious, that you have put thought into what it will take to make your make your dream a reality.
- Financial results and projections. Lenders will want to see how you have managed the business thus far. Profit and Loss, Balance Sheets and Cash Flow Statements can help them understand were the business has been and where it can go with the help of the loan.
While this list is not exhaustive, these tips can help prepare you for your small business loan application.