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Ways to Improve Your Chances of Getting a Small Business Loan

Starting and maintaining a successful business means a lot of hard work, time and money for small business owners. Many business owners need financing to reach their goal of success. Receiving financing for a startup can be a difficult task for aspiring business owners. Few entrepreneurs having enough money to get their business up and running and many look to banks and other lenders for assistance. The problem is, many large banks aren’t trusting of small businesses because so many fail. Taking steps to ensure your lender that you are deserving of a business loan is vital.

6 Ways to Secure Financing

Have a plan for you loan

Ask yourself why you need the loan and begin to form a plan for what you’ll do with the money if you should receive it. There are different types of small business loans and your reason for the loan will determine which type to apply for. Use your business plan to describe to banks and other lenders why your business is deserving of this loan. Ultimately, you want to prove to your lender that you have a clear idea of where you want your business to go, and that you have the drive to get it there. Being spontaneous won’t impress lenders. Make sure your idea is realistic and achievable within the marketplace. Your plan should also display a logical chronology of when your goals are meant to occur.

Make sure to outline exactly where the money from the small business loan is going and what it is going toward. Lenders are wary to grant a loan to someone who could potentially use the money for frivolous items and ventures. Prove to them that there is sense in where you are allocating your loan.

Analyze and improve credit

Lender’s will look at a business owners personal credit before approving them for a small business loan. Clearing up personal finances is the first step to getting approved for a small business loan. If your credit score is 700 or higher you should be approved and if it’s not, don’t panic. You can improve a low credit score in just a few months by paying bills on time and not maxing out credit cards.  Of course we’re a bit biased, but you can also look into factoring as funding option to improve a bad credit score.

Be organized and gather your documents

Have all documents organized and ready for the loan application process in case the lender has any questions or concerns about your situation. Being prepared and organized shows the lender you are ready and taking the process seriously. Lenders will assume your responsibility and will transfer into your business practices.

To avoid the mistake of showing up unprepared, create a checklist of the documents needed. Similarly, practice answering questions that are likely to be asked, including the amount of money you’ll need, how fast you’ll need it, and the amount of collateral you have to put up for the loan. Answering these questions beforehand will also give you an idea as to which loan option would be best to pursue. The documents you’ll likely need include:

  • Business and personal tax returns
  • Business and personal bank statements
  • Business financial statements
  • Business legal documents (Articles of Incorporation, commercial lease, franchise agreement)

Seek expert advice

Lenders want to see that you’ve sought advice from financial experts within the industry before applying for a small business loan. SCORE, is a free mentoring service provided by the US Small Business Administration where entrepreneurs can find free webinars, business mentors and other resources for starting a business. SCORE will connect you with retired business owners who have experience in your industry. You can also seek financial advice from an accountant or business networking groups.

Have a Financing Backup Plan

Having a plan B is just as important as having a plan A. When applying for a small business loan, you want to not only have your original plan ready, but also a backup plan to show you have thought of all possibilities. First, create a primary payment plan that explicates how you intend on paying your lender over time. But, don’t just rely on this original plan; back it up with another to ensure your lender that you plan on paying back your loan.

In addition to having a backup payment plan, you should also be prepared for a second attempt. If you are not approved for a business loan after your first attempt, figure out what went wrong and fix it. Believe it or not, reasons for declined business loans are usually reparable. Whether it be lack of documentation, or a poor credit score, learn from your previous mistakes and come back to your lender with a new preparedness and proposal.

Look into multiple lenders

While big name banks may be easier to come by, consider looking into other options. Small, local banks are more sympathetic to small businesses because they understand the struggle of being a startup. Many large banks see small businesses as risky to lend to because of their high failure rates. As such, it is wise to approach like-minded people who are more empathetic and willing to invest in small businesses.

Similarly, explore different lenders. Don’t feel as though you need to limit yourself to one loan option. Spreading your risk across a few banks can be good, especially if your business hits financial strife. Or, consider looking into alternative lending options such as invoice financing, a line of credit, merchant cash advances, or a government-backed loan.

Securing financing for your small business can be tough. Be sure to explain to lenders why you are a good candidate for this loan and what you’re going to do with it. Good credit plays a big role in securing financing for your small business. As mentioned above, work to maintain a good credit score at all times. Always refer back to your business plan when you have concerns and don’t be afraid to reach out to experienced processionals for help. Lastly, be sure to have confidence in yourself and your business idea. Confidence can be sensed by lenders and will help them favor on your side. Remember: don’t get discouraged if this process takes a few tries. Make improvements where you see fit and try different lending options to become the entrepreneur you’ve always wanted to be.

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