Obtaining a small business loan can be a critical step to growing your small business. Unfortunately for many small business owners, the business loan process can end up being a roadblock to success.
According to a 2015 small business credit survey by the Federal Reserve, only 50% of financing applicants were approved for the full amount for which they applied. This means that half of small business owners didn’t receive the funding they needed to grow or maintain their business.
These numbers may sound dismal, but if you are a small business owner in need of a business loan, don’t lose hope. An insufficient application and lack of preparedness are two of the major reasons why loan applications are denied. But there are simple steps that you can take to prepare for the business loan process and help it run more smoothly.
Follow these expert tips to put your best foot forward when it comes to applying for a small business loan.
Things to know about business loans
- What kind of loan you need: there are many loan options available to small business owners today. More choice is always a good thing when it comes to finding business funding, but it can be difficult to figure out which loan is right for you. Fortunately, there are resources such as this simple quiz to point you in the right direction.
- What you will use the loan for: lenders will want to know your specific plan for the implementation of your new funds. Whether you are hiring more employees, expanding to another location, getting new equipment, or purchasing inventory, you should know exactly what the money is going to accomplish.
- How much capital you need: just as it’s important not to ask for too little, it’s important not to ask for too much. Lenders expect a return on their investment (you), and if your requested loan amount is falling too far on either end of the spectrum, your application will come across as ill-prepared or naïve. Either on your own or with an accountant, forecast your revenue and profit quarterly to predict how much funding you’ll need and when.
- You have capacity to pay back the loan: both you and your lender should be confident that you can realistically pay back your loan. If you can prove this in your application, you have a much better chance of being approved for your desired loan. Because you know how much you are asking for and what you are using the money for, you should be able to forecast your return on investment and predict when you’ll be able to pay back your loan.
Things to prepare ahead of time
The biggest key to having a smooth and successful business loan process is to have detailed information about your business prepared. The list of documents required for a business loan application is a long one, and not every document will be required for every type of loan, but we’ll do our best to summarize it here:
1. Proof of legitimate business
Business License: your basic business registration or other industry-specific licensing.
Proof of Ownership: if your business has multiple owners, you’ll need written permission from your partner to apply for a loan.
Business Plan: not always required, but will help prove your seriousness about your business and obtaining a loan.
2. Proof of customer base
Customer List: proof of customers including names, contact information, and amounts invoiced.
Accounts Receivables Aging Statement: proves your business’s cash flow and shows how quickly your customers pay you.
Credit Card Processing Statements: for retail, this is solid evidence of your sales volume.
3. Proof of financial health
Business Tax Returns: 2-3 years’ business tax returns will show your long-term revenue history.
Profit and Loss Statements: 2 years’ statements to show your business’s revenue and expenses.
Business Banking Statements: at least 4 months and 12 months if your business is seasonal.
Sales Forecast: if your business is too new for tax returns and statements, provide a researched sales forecast.
Things to double-check before you proceed
- Your business credit score: business owners who understand their business credit scores are 41% more likely to be approved for loans. Be sure to know and understand yours.
- Your online presence: many small business loan lenders are now looking at applicants’ social media accounts and online presence. Be sure to double-check yours for professionalism.
- The fine print: before you take on any kind of business loan, be sure to double-check the fine print so that you are aware of any hidden costs, such as application fees.
Get approved for the best loan you can get
If being approved for a small business loan is a hurdle, the real challenge is preparing for the jump. Fortunately, if you follow these expert tips you’ll be bringing your A-game to the business loan application process.
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