When you’re looking for your small business loan, there are steps you can take early on to streamline the process and avoid common mistakes.
From preparing loan documentation to improving your credit score, you can get started before you apply to increase your chances of approval. These business loan tips will keep you on track to submit a solid loan application for review and approval.
1. Select the right lender for your business and industry
There are many financing options available to you as a small business owner. In addition to the loans offered by banks, community lenders, micro-lenders, and online loans, programs are also available at the federal, state, and municipal levels. Knowing your options and understanding the eligibility criteria and requirements for each loan program will help you make a sound decision when applying for small business loans.
It’s important to work with a bank or lender that has experience working with small businesses in your industry. When researching your loan options, you may find some lenders have more experience in your industry than others. For example, some lenders work with restaurants, while others find this industry to be too risky.
Be sure to ask potential lenders about their experience in your industry, your geographic location, and in working with businesses with similar needs to yours. Ideally, you should be interviewing your potential lender to see if they would make a good partner – someone who will give you and your business the attention and resources it needs.
2. Prepare the required documentation before you apply for a loan
Every business lender has different requirements to qualify for their loan products. It’s important to review the requirements for each option you’re considering to make sure you can meet them.
Ask potential lenders what paperwork will be required for your application and get started preparing it before you apply.
Here are a few common requirements most lenders will need:
- List of owners for your business with 20% or more ownership
- Description of your business, such as an executive summary of your business plan
- Details of your loan request
- Last two to three years of federal tax returns for you and your business
- Balance sheet and income and expense statement dated within 90 days of your loan request
- Current accounts receivable and accounts payable aging reports (dated within 90 days)
- Income and expense projections for the next two years (monthly figures for the first year if your business is new)
- Personal financial statement for you and any other owners
- Last two to three years of personal federal tax returns for all owners
- Copy of your current bank account statements that show the source of cash equity
- Copy of picture IDs for all owners (driver’s license, passport, government photo ID)
If the lender has someone available to walk you through the application process, take advantage of their guidance and expertise to submit a complete loan package.
3. Stay on top of your credit score
Your personal credit score is an important consideration in your loan application. Your credit score shows your ability to borrow money and pay it back as agreed. Take some time to understand how your credit score is calculated so you can take steps to repair and improve it if needed.
Your loan application might be declined if your credit score is lower than a lender’s requirements. While some lenders can be flexible in what they can accept, others have strict requirements on credit.
You can monitor your credit score by requesting your free credit report each year and reviewing it for any errors. If you do see an error, take action quickly to correct it since it can take some time for it to be completely cleared.
4. Make sure you have enough cash flow to repay the loan
As the owner of your business, it’s important to have a solid understanding of the business’s financial health.
There are three main financial statements you should fully understand: your balance sheet, profit and loss statement (or P&L, income statement), and your cash flow statement.
Your P&L statement usually uses an accrual basis of accounting, which means it will include revenues that may not have been collected yet. Your cash flow statement, on the other hand, will show you how much cash you have available at that specific time period.
If your business has been operating for a few years and is generating profits, you’ll most likely have reinvested some of the profits back into the business; this is called retained earnings. Businesses retain earnings to create growth opportunities such as purchasing new and updated machinery, research and development, or paying down liabilities.
Every business owner should know how to create these three main financial statements and understand what’s behind the numbers. This will help you monitor your business’s cash flow and get approved for credit when you need it. If your business doesn’t show adequate cash flow, it will likely have a negative impact on your loan application.
5. Apply for the right loan type with enough funding time to meet your needs
It’s important to match the length of the loan term to your use of funds. Don’t make the mistake of using a short-term loan with high interest to cover a longer-term expense.
Also, be aware of how much time it will take from submitting your complete application to your loan will be funded. Do you have time to apply for a loan that takes more than 45 days to approve and fund? Or would you be in a better position with a loan that has a quicker turnaround time from application to approval? Ask your lender how long the process takes so you can plan accordingly.
When you’re ready to apply, talk to Pursuit about your options
Looking for financing for your small business can go smoothly if you’re aware of the common mistakes that can stand in your way. Get to know the lending landscape, including banks or lenders that serve your industry, common loan application requirements, and what can make or break your loan application.
Pursuit offers more than 15 different business loan programs that can meet nearly any business need. Talk to us today to find out how we can work together to fund your business.
