In the small business world, one of the most common obstacles that business owners face is a lack of sufficient funding. This includes both the short-term capital needed for day-to-day operations like rent and salaries, as well as funds for things that help drive growth –such as increasing staff and inventory, adding new equipment, expanding locations, or marketing.
Often, entrepreneurs pinch-hit with savings or personal credit cards, but there comes a time when nearly all business owners must borrow to fuel growth or address working capital needs. While taking on debt can be daunting, if you’re prepared for the process and secure funds from a reputable source with fair interest rates and repayment terms, you’ll quickly see how much the extra capital benefits your business.
To help you prepare for the loan application process, Pursuit’s Business Advisory Services team put together a list of six issues we see time-and-again from small business owners and steps to help you overcome these weaknesses. When you do, you’ll be in a better position when it comes time to apply for a business loan and the process will go more smoothly.
Issues and Solutions
1. Preparation:
If you know you’ll need a loan in the future (and small businesses that want to thrive will), begin to prepare for the application process at least two or three months in advance. Here’s what to do:
- Get your bookkeeping program in order. If you’re among the small business owners who keep paper ledgers, now is the time to switch to a bookkeeping software program. Most lenders frown upon error-prone written ledgers, and systems such as QuickBooks® can automate many of your financial tasks, including invoicing, and can easily generate financial reports.
- Ensure you’re up to date with tax filings. This is a critical step, whether your business is a sole proprietorship (where your business and personal taxes are filed as one) or you have a separate business entity structure. Legitimate lenders will expect the business to have filed appropriate returns and paid (or have a plan for payment of) taxes. Lenders that are uninterested in the status of tax filings and payments are not likely to offer a loan on reasonable rates and terms.
- Check your personal credit report. Get a copy of your credit report (you can obtain one annually from each of the three major credit reporting agencies, or do it easily and for free through websites like Credit Karma®). Check them closely and immediately report any errors to get it fixed, and address any issues like outstanding payments that hurt your credit rating. Keep in mind that credit bureaus can take up to 60 days to update your credit report – take needed steps promptly so that when it’s time to apply, these issues are resolved.
- Update your business plan’s executive summary or capabilities statement. You should have at least a basic business plan, and part of it should be your executive summary. Include information that details the nature of your business and a brief synopsis of its history and plans, as well as previous experiences that demonstrate your ability to run it well. Consider the preparation of a “dashboard” with key indicators of business performance and organization.
2. Knowing your industry and competition:
It’s hard to believe, but many small business owners can’t articulate a lot about their industries or competitors. Take the time to develop talking points on your business’s operations, cycles and competition, as well as industry trends. This demonstrates that you’re forward-thinking and instills confidence in your lender that you know what you’re doing. Analyze what your competitors are doing and how you expect to get and maintain a competitive edge with specific plans.
3. Understand your financials:
When in front of a lender, you want to walk him or her through your business’s financials, and your story should match the numbers that are reported on your tax returns. It’s critical that all revenue and expenses are accurately represented. For example, if you’re paying yourself a salary, make sure it’s reported in your profit and loss statement. Keep in mind that your accountant will prepare your tax returns based only on the information that you’ve provided.
4. Prepare for your loan interview:
Are you ready for that initial phone call or meeting with your lender? First impressions count and can affect your loan outcome more than you know. You want your lender to be your best advocate, so impress him or her with your organizational skills and thorough knowledge and understanding of your business’s operations and financials. If there was a critical or crisis period for the business, be ready to discuss what happened, why your previous strategy didn’t work and what steps were taken to overcome it. Remember that the strength and experience of management is a key component in the loan decisioning process.
5. Know how much you need and why you need it in advance:
Have a clear plan of your loan purpose and the amount you need. Be ready to talk about your project and have an itemized list of the ways you’ll use the loan and how you determined the costs for each of the items.
6. Complete the loan application fully and accurately:
Far too many potential borrowers submit applications that are incomplete or inaccurate. This tells lenders that you’re disorganized or careless – neither of which will help you get the funding you need. Take the time to go through the application multiple times, check every detail, answer questions accurately, and make the best impression you can. Review the application materials with someone you trust.
Know that if questions are not answered fully and truthfully, lenders may question your integrity. It’s not safe to assume that negative information will lead to a loan decline, but it is safe to assume that misrepresentation or lack of candor will.
Do not underestimate the ability of the lenders to get information via search services that are widely employed to obtain background information. Lenders want to invest in quality – make sure they know that you’re a good bet.
Conclusion:
Preparing for the loan application process goes a long way toward improving your chances of getting approved by a lender that can offer you good terms. Take these steps well in advance of applying – at least two to three months is advised – and you’ll not only be better positioned for the process, but you’ll find that you’re managing your business more effectively as a result, too. If you need assistance preparing for a loan application, contact Pursuit’s Business Advisory Services team.
