Getting your first small business loan is a major milestone. But so is going through the application process! From making the decision to seek financing to putting together a small business loan application.
Before you submerge yourself in the business loan application process, make sure you understand your options. Are you sure you need financing? If so, is a term loan the best option for your industry and stage of growth? Small business financing is available in many forms, from business credit cards and small business loans, to invoice financing or factoring.
Understand the pros and cons of each so you know what to expect and where to find the most appropriate financing for you.
Once you’re ready to dive into the world of small business loans, you’ll need to get a firm grasp of two essentials: your credit and your use case. With that knowledge, you’re ready to prepare a successful application for a small business loan.
The milestones for obtaining a business loan
YOUR BUSINESS CREDIT SCORE
Your Business Credit Score
Small business owners are notorious for mixing their personal and business finances, especially at the start of a new venture. The problem with overlapping accounts is that they can cause huge headaches when it’s time to file taxes or apply for a small business loan. Establishing business accounts early also gives you the chance to build a credit history. It also prevents personal issues from affecting your business credit score and vice versa. Separate business and personal accounts as soon as possible to protect yourself and avoid confusion.
As you do business, you are building a business credit report. How does a credit report translate into a score? There are technically different companies that calculate slightly different scores. The Dun & Bradstreet PAYDEX score takes nothing but your payment history into account. Experian and Equifax also consider legal filings, public records, and collection agency data. All three scoring systems come up with three digits, but each employs a different scale. To maintain a healthy business credit score in any system, paying your bills on time is key.
YOUR PERSONAL CREDIT SCORE
Even after you’ve established separate financial accounts for your business, your personal credit score still matters to lenders of small business loans. Imagine hiring a professional driving instructor only to discover he’s accumulated a dozen moving violations in his off time. In the same way, your personal creditworthiness matters in business relationships.
What determines your personal credit score? As with a business credit score, the most important factor is your history of payments. The more often you pay your bills on time, the better your score is.
But paying on time doesn’t guarantee a great score and great terms for your small business loan. Other factors include total debt owed, types of credit you’ve had, the length of your credit history, how much available credit you’ve used (i.e. utilization rate), and how often you’ve applied for credit in the past.
KNOW HOW MUCH YOU NEED AND CAN AFFORD
As a small business owner, you need to figure you exactly how much money you need as well as how much you can afford. Working with an accountant before applying for a small business loan can help you get accurate estimates of both amounts.
Making your request as specific as possible helps you even more as it helps lenders assess your small business loan application. Know exactly what you’re asking for and why.
An excellent way to show you understand your business is to build out a budget for the funds you’d get from a small business loan. Estimate what you want to use them for and how much that will cost. If you need to buy an expensive piece of equipment, cite the market price of that piece and any associated costs. Project how much revenue owning that machine will bring into your business. These numbers don’t need to be precise; just use whatever information you have to back up your request for a small business loan.
It’s easy to justify needing money, but when you know your needs inside out, you’re more likely to receive a small business loan offer for that amount.
YOUR FINANCIAL STATEMENTS
Like credit scores, financial statements say a lot about your business at a glance. Take a look at your financials from the last few years. Ask us to help prepare the following statements in preparation for your small business loan application:
- Profit and loss statement
- Balance sheet
- Statement of cash flows
Once you have your financial statements in front of you, you can answer these important questions, which affect your small business loan application:
- Where are you making money?
- What are your primary costs?
- Are you profitable?
If the answer to #3 is no, you need to have a plan for how to get there. Where is the operating leverage in your business going to come from? Perhaps it’s opening another store. If you’re a retail brand, perhaps it’s from securing better rates from your suppliers once you start ordering in bigger quantities. Understand how you’re going to improve your profits, and you’ll have a stronger case for getting a small business loan