Small Business Loans: When to Apply and How to Prepare

19 Oct
When and How to Prepare for a Small Business Loan

All businesses need capital to grow, and the questions of when and how to apply for loans are two that many small business owners ask.  In this article by the Excelsior Growth Fund (EGF) Business Advisory Services team, we look at how to determine when an existing small business needs funding and steps to help you prepare an application and increase your likelihood of approval.

 

 

1. Evaluate your business’s funding needs

As your business grows, you may find yourself taking on new projects or larger clients, hiring additional staff to meet sales goals, or updating the equipment or facility you currently use. If so, an infusion of cash may be critical and the best time to start preparing for a loan application is before the funding is actually needed.

You (and your partners, if appropriate) should ask, “How will this add value to the business and help it grow?” and “Does this support the business’s mission and plan?” If the answers point to positive responses, then this is likely a good time to apply for a loan.

2. Figure out how much money you need

After you’ve ensured that what you want to do aligns with your goals, you’ll need to figure out how much money you need. You should have an idea of what your growth plans will cost from your financial projections.

Also, know that the type of loan you’ll need depends on the planned use:

  1. For short-term uses such as inventory purchases, seasonal cash needs or covering expenses while accounts receivables are collected, a short-term debt, like a line of credit, is often best.
  2. For longer-term uses, such as vehicle and equipment purchases or construction, term loans are typically the way to go.

3. Identify the right lender for your business

Many business owners think that the next step is to find the lender with the easiest application and the quickest turnaround to deposit money in the bank. While those are important, there are other critical considerations that can make the difference between your long-term success or struggle.

When looking for a lender, your bank is a good starting point, as are non-profit lenders like many credit unions and Community Development Financial Institutions (CDFIs, like EGF). These reputable lenders will provide you with transparent loan terms that offer manageable annual percentage rates (APRs), with low fees and longer repayment terms that leave you with more money in the bank each month. It’s also important to avoid taking on predatory loans. These loans typically have high interest rates and unreasonable repayment terms (like daily or weekly payments) that can cause extreme financial distress for small business owners.

Banks often offer lower interest rates, but some business owners may have difficulty meeting eligibility criteria for traditional financing. CDFIs are mission-driven institutions and they can offer more flexible criteria that make it easier to obtain loans. When considering lenders, be sure to speak with both banks and CDFIs to get your best options.

Find out the eligibility requirements for different lenders, including minimum years in operation, loan ranges and limits, and minimum credit scores and cash-flow requirements. This information can be found on lenders’ websites or by contacting them directly.

4. Prepare a strong application

When applying for a business loan, it’s important to be prepared for the process. To increase your chances of getting approved, take a few steps to get prepared and consider any issues that can be addressed now.

Here are some of the most important things to prepare:

a) Define the purpose and use of the funds:

  1. When speaking to potential lenders, clearly define how you’ll use the funds and how those expenses support business growth.
  2. Show potential lenders how you’ll be able to afford the loan repayment.
  3. Have supporting documents available, such as a copy of your business plan, that show how this loan fits in and how these changes will help your business grow.

b) Be ready to discuss your business’s financials and have financial documentation ready, including:

  1. business and personal tax returns
  2. a recent profit and loss (P&L) statement for your business
  3. a balance sheet dated within 90 days of the application 

Timing and preparation are keys to success

Determine if the time is right, then speak with lenders about your plans. Many lenders, including EGF, have additional services available to help small business owners achieve success, too, like assistance with business plans, financials and marketing. When you’re ready, contact us to learn how we can help.