Whether you're starting a new business or taking advantage of a new growth opportunity, you'll probably need a little extra capital to ensure it’s a success. Before you apply for a small business loan, it’s important to understand the key items you’ll need to prepare. Our team of expert business advisors compiled the following four must-haves for a strong business loan application.
Prepare these items in advance to set yourself up for approval
1. Have a clear loan purpose
Lenders want to understand why you’re seeking financing, and how you intend to use the money. Before you decide to take on a small business loan, make sure you know exactly what you’re going to use it for. You’ll also need to prepare an explanation of how the loan will help your business grow, and how it fits into your overall business plan.
Be specific about how you plan to use the funds and how much financing you think you’ll need. For instance, rather than asking for $50,000 for working capital, create an itemized list that shows that you need $20,000 to buy inventory, $15,000 to cover the cost of new employees and $10,000 to ramp up your marketing campaign. By clearly outlining your intended use of the loan, you’ll show lenders that you have a clear vision for your business and will be using the loan to pursue further growth.
If you simply ask, “how much can you give me?” it’s a major red flag for most lenders. Be prepared with an estimate and rationale to back it up to demonstrate you’ve done your homework, and then work with your lender to ensure it’s the appropriate amount for your needs.
2. Have a rock-solid business plan
While not all small business lenders require a business plan, having one in place will help improve your chances of loan approval. A solid, well-documented business plan shows lenders that you’ve carefully thought about your growth and operations strategies, and that you’re ready to take on additional financing.
When creating your business plan, lay out exactly what your business does, how it makes money and why customers pay for your products and services. In your business plan, you’ll also want to include detailed financial projections, a clear mission statement and information about your operations and management. You’ll also need a market analysis that outlines the competitive landscape in your industry, and that explains what makes your business different than your competitors.
If your business plan is in shape, consider also creating a growth plan for your business. This plan specifically outlines the items your business needs to grow and expand, and focuses opportunities going forward rather than current operations.
3. Maintain a Solid Personal Credit Score
Even though every lender has different credit score requirements, having a good personal credit score can increase your chances for approval when applying for a business loan. Lenders want to know that borrowers manage their finances well and have the ability to repay their debts. When lenders review your personal credit history, they’re evaluating your credit use and your capacity to pay back existing and new loans.
Before you apply for a business loan, get a free copy of your credit report and review it for errors. If you do find an error, take action to correct it immediately. You can also check your credit score and more information for free on websites like CreditKarma.
If your personal credit score could use some improvement, there are a few things you can do now to get started. For example, keep your spending to no more than 20 to 25% of your credit limit, and make sure that you’re always paying your bills on time. To ensure you always have on-time payments, consider setting up auto-payments each month.
4. Keep up-to-date financial statements and tax returns
Lenders need to see the latest copies of your records when they’re reviewing your business loan application. Even if you’re not getting ready to apply for a loan, it’s important for all business owners to keep their financial documents up to date. Doing so not only allows you to quickly provide these documents to a lender, it also ensures you have an accurate snapshot of your business’s financial picture at all times. When you are ready to apply, this having these documents ready will demonstrate that you’re familiar with your financial situation and keep your business organized.
If you need assistance getting your financial documents in order, start by reviewing your current bookkeeping system to see where you can find room for efficiencies. If you’re using a paper system to track revenue and expenses, it may be time to use software like Quickbooks to better organize your financial system.
Being prepared well before you apply for a business loan can make the application process run smoothly while also increasing your chances for approval. Use these tips the next time you’re getting ready to apply for financing, and if you need more assistance, get in touch with us today.