Learn how to be prepared to apply for a small business loan and increase your chances of getting the business funding you need.
Before you begin applying for a small business loan, it would be wise to know if you're actually ready. Different lenders have different requirements that you must meet to get approved. Therefore knowing and understanding those requirements will help you determine if you are ready to apply for your small business loan. Examples of what lenders might require of you include:
- Meeting their credit criteria -- most lenders will review your personal credit history to determine if you qualify for small business funding, especially if you own a startup with no proven track record of success just yet. The key to meeting a lender's credit criteria is to avoid making late payments on the accounts reported on your personal credit profile. Derogatory and delinquent accounts are the number one reason why lenders deny applicants (Tweet this!). Keeping your credit card balances below 30% of the total credit limit is also ideal. If lenders see that you have maxed out your credit cards, it could negatively affect your chances of approval. Become familiar with your credit profile and FICO score. Lastly, monitor your debt to income ratio. Taking on too much debt (when you don't have the income to pay it back) could raise that ratio, which can be a red flag to some lenders.
- Having your loan package ready. You should be prepared before you approach a lender to apply for small business funding. Having your loan package ready is extremely important. A loan package should include a business plan (with an executive summary) and 2-5 years of financial projections. It should also include the loan application and proof of registration of the business. Having a well constructed loan package conveys your awareness of what it takes to qualify for a loan and what it takes to pay it back.
If you meet a lender's credit criteria and have your loan package ready, the next step would be preparing for the lender meeting. Of course, in today's world of online lending this may not be necessary, but some lenders still like the face-to-face meeting. Before the actual meeting, the lender will usually ask to see your loan package so they can review your business plan and financial projections before they speak with you. Therefore, it would be wise to fully understand everything that is laid out in the business plan prior to the meeting. This way you will be able to easily answer all questions the lender throws at you.
This is especially important if you hire a consultant to help you complete the business plan. Make sure you are thoroughly involved in the business plan development process so you'll be aware of everything incorporated into the written document. Lenders can sense when you lack knowledge of your business industry or the details of your business plan, so study it like you would study for a test.
Lastly, keep in mind that there are hundreds of lenders who do not require some of these things. There are merchant cash advance lenders who primarily care about your bank statements and credit card statements and will probably never ask you for a business plan. Factoring companies are mainly concerned with the aging report that shows your debtor and how likely they are to repay you. Factoring companies probably won't need a face-to-face or your business plan. Whereas if you want an SBA loan, there's a good chance you'll be meeting with a banker who will need your business plan among many other things.
Lenders have different requirements but it's a good idea to be fully prepared no matter what they ask for or throw at you. It's always better to be prepared, no matter what. Preparation doesn't mean you're guaranteed of an approval but would you rather be Ray Allen at the free-throw line or Shaq?
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