6 Tips for Landing a Small Business LoanLanding a small business loan can be tricky, but if you follow these tips you’ll be ahead of the competition.
Landing a small business loan doesn’t have to be stressful. With some research and a clear understanding of what lenders are looking for, you can make the process less aggravating.
Stephanie Brown has been a lender since 2002. Over the last eight years she’s been directly approving small business loans with Bank South in Georgia. She recommended these five tips for securing a small business loan.
1. Know your updated credit score
Your credit score is a crucial piece of the puzzle, especially if you’re applying for a loan without prior business ownership. A high credit score helps with financing – 720 is considered a good score – but lenders take into account extenuating circumstances if your score is lower, such as unforeseen weather events affecting your business or personal medical issues. Knowing the information lenders will uncover lets you substantiate your credit history and be in a position to provide supporting documentation if needed.
“[Your score] is not a sink-or-swim kind of thing,” Brown said.
“We want strong credit, but as a business owner sometimes you’re late paying a credit card bill. A lower score won’t kill the loan opportunity if there is a legitimate reason behind it.”
2. Have a professional business plan
Startup businesses secure financing based largely on the credit history of the majority owners, available capital and a business plan. A professional business plan includes market analysis, competitor knowledge, realistic target goals and contingency plans.
“We really want to know that they understand business, and that’s what we get out of a good business plan,” Brown said. “It should say who their market is, how they’re going to get in front of their market, what their risks are, and how they’re going to get around those risks. We also want to know what they’re going to charge for their good or service.”
3. Be realistic when presenting your business
Banks want realistic projections, not best-case scenarios. Be able to talk about your business intelligently, because lenders will check market conditions against your projections.
“You’re not going to get dream margins the first year,” Brown said. “It’s going to take some time before you’re profitable, and if somebody is not prepared for that, they might give in too early because they were unrealistic in their profit projections. We need to know they understand what they’re getting into.”
4. Understand what financial statements mean, not just what they say
Lenders underwrite businesses that limit the risk inherent to the loan. If as a business owner you can’t articulate your financial statements and projections with confidence, don’t expect a bank to approve your financing. Knowing what your financial statements mean projects business acumen.
“It’s very difficult to underwrite a loan when you’re asking questions to somebody who is in the business everyday, and they can’t answer them because they don’t understand their financial statements and what those statements are telling them,” Brown said. “I shouldn’t understand their industry better than they do.”
5. Be invested in your business
A small business loan is designed to put your business over the top, not be everything it needs to get it off of the ground. Lenders need to know you’re more heavily invested in the success of the business than they are, and one way to show that is to have capital of your own in the company.
“It’s difficult – I’m not saying it’s impossible, but it’s difficult – for the bank to have more invested into the business than the owner,” Brown said. “Our upside is we get our principle and a little interest back, whereas the business owner’s upside is unlimited. So we do like the business owner to have capital in the business.”
6. Use the Small Business Administration (SBA) as a guide
Many prospective small business owners don’t know the SBA exists, but it’s one of the most powerful resources available for businesses looking to secure financing. The SBA doesn’t make direct loans, but it does set guidelines and guarantees portions of loans from banks, which helps limit lender liability. It also provides a number of financial assistance programs for small businesses, including debt financing, surety bonds and equity financing, as well as tips and guidance on what it takes to secure a loan.
“The SBA website will teach new business owners about writing a business plan and projections,” Brown said. “Applying for the SBA loan is a very good exercise for a startup business, because a lot of the questions on the application are really insightful, good questions, and even if they don’t want an SBA loan, the information is good to have.”