Better Your Chances of Getting a Small Business Loan

If you've ever been turned down for a personal or small business loan, it's hard to remember that banks really are in the business of lending money. A number of factors drive loan-making decisions, but together they point to the same thing: the likelihood that your business (and you) will repay the loan based on the terms to which the bank and you agree and thus, how willing the bank is to make the loan. The more comfortable your lender is, the better your chances of getting the small business loan you need.

Be Creditworthy
Above all, your lender is most concerned with increasing their sureness that you'll repay the loan. Your personal credit history and the credit history of your business are central to your lender's evaluation. What they're looking for is:

  • The number of loans and kinds of loans you've taken out in the past and what you're paying on now
  • The amount of those loans as compared to your income, also known as your debt-to-income ratio
  • How you've managed your loan payments-did you pay the loan back early, on time, late or not at all

While the numbers on your credit report may be difficult to argue with, they're not the sole basis for loan approval. If extenuating circumstances like an accident, injury or illness, or divorce contributed to undesirable numbers on your credit report, be sure you explain your circumstances to the loan officer. Ask colleagues, former bosses and other professional acquaintances to write a letter of reference for you showing why they believe you're worthy of a loan.

Understand Your Business's Financial Needs
If you've written a business plan (cross link to How to Write a Business Plan), you have a good idea how much money you need, but before you make an appointment with a loan officer, you should also understand what kind of loan best meets your needs (a line of credit versus debt financing, for example), what repayment schedule supports your overall financial objectives and which banks may be able to offer you creative financing that help cut the cost of borrowing money.

If you have a good sense of this already, you'll be able to show your lender more than what you plan to do with the money, but how you intend to repay it. Other questions you should be able to answer include whether you'll be able to continue paying on the loan if your business fails and how. Having a sound exit strategy may help put lenders at ease.

Write a Great Loan Proposal
Your loan proposal is a subset of your business plan (cross link to How to Write a Business Plan) and includes your company description, your organization and management structure, and detailed financials (historical and/or projected earnings and expenses for the first five years, profit and loss statements, and balance sheets if you have them).

You'll also list how much money you're asking for, what you intend to do with those funds. Last, but not least, this is your opportunity to present the financing and repayment terms you'd like to get.

Banks and other lenders may want to receive this information in different formats. Be sure to ask each bank you're meeting with for their preferred format and tailor the information they're requesting-and you'd like to present-to meet their specifications.

Demonstrate Your Knowledge, Skills and Abilities
If you're borrowing money to expand your business, you've already proven it's a successful venture and you're skilled at managing it. If you're just starting out or looking for a second round of funding to get your business off the ground, you may need to prove yourself and your business strategy to the bank.

Be able to speak to your expertise and show how it pertains to your intended business. If want to open a florist shop, a portfolio of your designs would be a strong supporting element. If you don't have the technical, manufacturing or production skills that your business depends on, you'll need to be able to convince them you're able to find those people, recruit and retain them if you haven't hired them already.

Dress the Part
Although dealing with banks and lenders can feel impersonal sometimes, they don't lend money to financial statements-they lend it to people. The more you can do to present a polished and professional image to the bank, the more respect you're likely to earn. Mutual respect goes a long way toward establishing a relationship with your bank and that respect may translate into shorter decision and processing time, lower fees and even opportunities to connect with local businesses who may turn out to be customers, suppliers or mentors.

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Many business owners apply for loans or lines of credit without any thought to their own personal credit histories. They mistakenly believe the loans made to their businesses will have no impact on their personal credit and that they cannot be personally liable for the business loan.

The simple fact is that when you want to start a small business, you will almost always be needing a business loan. Even if you have the initial capital needed to start the business, it is necessary to then have quite a bit of money on top of that secured to cover the expenses for at least the first year of that business (since many small businesses take many months before they finally start to become profitable).

It's possible to get an unsecured small business loan, but you'll need good credit, a well-written plan and the ability to sell yourself to the lender.

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