Acquiring a business loan can be a crucial element to starting or expanding a business. But the continuing credit crunch has made the process far more challenging than it once was. Excellent credit and financials are requisite, but even those can’t guarantee a lender will be willing to provide financing. Anyone seeking a business loan should be prepared for a scrutinizing and potentially drawn-out application process, so it’s important to be organized and ready to argue on behalf of your business.
Prepare a Traditional Business Plan
It’s essential that any loan application present a detailed and heavily-researched traditional business plan. In today’s economy, even great ideas can flop, so without a clear roadmap to success lenders won’t be willing to take a risk. Your business plan should include extensive market analysis and facts about your target customer base and the market share you can expect to grab. It should also include specific income, expense, and cash-flow projections backed up by sound reasoning. Flaunt your experience and your qualifications to succeed in your industry. Your business plan should make a near-airtight case that you will be able to pay back your loan.
Be Specific When It Comes to Financials
The funding request section of your business plan should also be grounded in specifics. Detail exactly what each dollar of the loan will be going towards. This not only shows the lender that their loan will be used efficiently, but it’s helpful to you as well. Many businesses overestimate their funding needs, which can lead to unnecessary loan rejections or high interest rates. If the loan will be applied to different areas, prioritize them: you may be able to get the funding you need for essential equipment even if you can’t get enough to bring on new hires.
Also include any funding requirements that you expect to need in the next five years and any strategic financial situation plans, such as a debt repayment schedule or a potential buyout. Be clear about the terms you would like to have, but be prepared to be flexible about them when negotiating the loan.
Think Through Collateral
Another important consideration, even for smaller loans, is to be prepared to put up collateral and to contribute your personal wealth. Real estate is common for collateral, with a recent study saying 19% of small business owners are using a mortgage to help finance their business, and 15% are using real estate as collateral. Prepare a collateral document indicating what assets you have that could be used as collateral. Many small business owners are also dipping into their 401(k)s, college funds, or personal savings to put up money for their business. Contributing your own assets shows lenders that you have confidence in your business and are taking on personal risk as well, making them more likely to approve your loan.
Approach the Right Lender
Perhaps the easiest, but still very effective way to improve your chances for approval is to diversify the lending institutions you apply to. Big banks have been advertising their interest in helping small business owners, but they also have the highest rates of loan rejection, even for businesses that are existing customers.
Meanwhile, smaller, local banks and credit unions have much higher approval rates, yet small business owners and entrepreneurs often overlook them. Many small banks receive federal support for small business lending and they aren’t nearly as exposed to the international financial woes that big banks have been suffering. They also tend to be much less rigid about credit scores and financial ratios when considering applications. Expand your list of potential lenders to include smaller, friendlier institutions and you will not only improve your chances for approval but you may also foster personal relationships that can be valuable for years to come.
Small business financing is still hard to come by, and despite improvements in economic indicators, it’s likely to remain so for the near future. But with the right preparation and a bit of determination, you should be able to find a lender willing to back your business.