So, you want to expand your business and live the entrepreneur’s dream. Growth takes capital, and that often means securing a small business loan. The money is out there, but to boost your chances for success, you’ll have to figure out how to show that your business is robust.
“In the end, it’s all about money, but in the beginning, it should be about planning,” says Mark Quinn, district director of the San Francisco branch of the Small Business Administration. “Without planning, small business owners often get turned down for a loan.” Here are 10 steps you can take to improve your chances of getting a small business loan:
Banks, credit unions, and online lenders set their own criteria for approving a business loan, but all of them are trying to answer one key question: What’s the risk of doing business with you? Expect any lender to check both your personal and business credit records. If your personal and business credit scores are on the low side, raise them by paying down credit cards and other debt and settling any liens against you or your business.
Be aware that credit bureaus have up to 30 days to resolve an issue, so wait until the bureaus resolve the dispute to apply for a loan.
Apply for a business loan well before you need it. Loans guaranteed through the SBA typically take 45 to 60 days for approval. And it may seem counterintuitive, but apply for a loan when your business is thriving: The sad reality is that it’s hard to get funding when you’re having a rough time.
“The worst thing you can do is go to a bank and ask, ‘How much can I borrow?’” says Quinn. “You should know exactly how much you need, exactly how it will be used and exactly how it will be repaid. That way, they know you’ve done your homework.”
You may have the best idea in the world, but you’ve got to convince the lender that you can carry it off. Your plan will need an executive summary (think: elevator pitch) that lays out exactly what your company does, how it will make money and why customers will pay for it. In addition, talk about your market opportunity and the competitive landscape (and of course, why you have an advantage). Don’t forget to describe your team members, your business model and your costs (salaries, rent, equipment and so on). Finally, attach three years’ worth of profit/loss statements, balance sheets, and cash flow statements. (If all this seems daunting, check out sample business plans from Bplans.)
Your lender will want to look at several years of business tax returns, your articles of incorporation and your debt-to-equity ratio, which is the amount you owe creditors divided by the financial value of your business. Be truthful.
Even though you’re used to working for yourself, you can really benefit from advice and networking from people who’ve been there. Before you apply for a loan, ask an SBA employee at your district office to sit down and review your file with you to make sure you have everything you need. Besides its district offices, the SBA offers coaching through its Women’s Business Centers and other offices tailored to minorities.
Lenders want to know you can pay back the loan by selling off assets, even if the business fails. “If you have any assets that can be used as collateral, it is important,” Quinn says. “The lender wants to see that you have skin in the game.” For collateral, try to stick to business equipment and assets other than your home.
A doctor’s medical practice may likely find it easier to secure a small business loan for expansion than, for example, the owner of a restaurant. It’s all about risk, and restaurants have a statistically higher rate of failure than most business ventures. If you own a restaurant and you run into obstacles with the bank, consider pursuing a loan through a nonprofit lender or community development organization.
If you need cash in a hurry or have bad credit, you may want to look into online or alternative lenders. To avoid getting stuck with high fees, have your attorney review the contracts. “Watch out for payday loans that charge extremely high interest rates — sometimes triple digits,” says Quinn. Quinn also cautions that merchant cash advances are repaid with a portion of credit card receipts, which can eat into your business profit margins. Finally, he advises all business owners to ask the lender the loan’s APR (even if the interest rate seems reasonable). “Just to give an idea, bank loan APRs are currently around 5 to 8 percent, and alternative business loan APRs are around 40 to 60 percent.”
Steve Evans is an award-winning journalist who has worked as a senior writer for SNL Financial and as a reporter for the Bristol Herald Courier, The Progress and the Richmond-Times Dispatch. He has also served as a magazine and online news editor at the Darden Graduate School of Business at the University of Virginia. He covers business financing and other financial issues for MoneyGeek.com.
Mary Purcell, MA, is a freelance consumer health and finance writer and a former director of the International Development Exchange (IDEX). She has written on startup funding, business loans, and insurance for MoneyGeek.com, MNN, Narrative, HealthDay and other outlets.