No one said running a small business was easy. The benefits of being your own boss may be numerous, but the challenges and stresses are large. More likely than not, at some point in your business’ lifespan, you’ll need some outside help to keep going.
Small business loans is one form of such help. Whether you need funds to get started, to expand, or just to stay in business, a small business loan can be a lifesaver for an independent business. The extra cash influx can be exactly what you need.
But applying for a loan can be stressful and difficult. The odds of rejection, especially in today’s climate, are high. How do you best set yourself up to succeed? Read on, and we’ll walk you through everything you need to know about how to qualify for a small business loan.
Build Your Credit Scores
The importance of a credit score cannot be understated. When it comes to getting any kind of loan from a bank or lending equity, your credit score is your golden ticket.
Many people don’t realize, but you actually have two kinds of credit scores: personal and business.
Your personal credit score ranges between 300 and 850, with the higher number being the stronger score. This score is based on how well you’ve paid off certain lenders: your credit card, your mortgage, and so forth. You’ll also have your FICO score, which is based on a number of factors in your credit history.
Your business credit score is less discussed but still potentially important. If you’ve been running your business for some time, you likely have a business credit score out there whether you know it or not. These scores run from 1 to 100, unlike personal credit scores.
In most cases, you’ll need strong scores from both kinds of credit in order to qualify for a small business loan.
That’s why it’s smart to begin preparing for a loan before you even need the money. It may sound counterintuitive, but positioning yourself for a loan takes time. You may need a year or more of proper borrowing and returning before your credit score is in a healthy place.
There are some lenders online that give small business loans no credit check. These lenders are usually more interested in your business’ cash flow and track record as opposed to your credit score.
Gather Your Legal Documents
You’ll need a large amount of paperwork to ensure you’re qualified for a small business loan. Without these files on hand, you’ll likely be denied at the office of your potential lender.
The two most important pieces of paperwork you’ll need to have are personal and business income tax returns. You’ll also need an income statement that shows the money that your business has made.
These documents will give potential lenders a fuller understanding of the profitability and reliability of your business. Just as vital is your driver’s license, business leases, and articles of incorporation. These objects are obviously under less scrutiny, but still essential to securing a small business loan.
If you have a limited operational history you also may want to bring financial projections with you. These can give potential lenders a better idea of the future of your business.
Develop a Solid Business Plan
When you look for a small business loan, you’re asking a lender to trust in and believe in your business. If you don’t have a solid plan for how to use the lender’s money, how can you expect them to trust you?
A solid business plan is the key to securing a small business loan. It’s also the key to ensuring you’ll use the funds properly and intelligently over the next few months or years.
A good business plan should state both current and projected financials. You’ll need to show the lender that you will have enough cash flow on hand to cover ongoing business expenses as well as the cost of loan repayments.
An impressive business plan will also include industry analysis. It should show an understanding of industry trends and how your business hopes to take advantage of them. It should also demonstrate the strategy your business will take in promotional or marketing areas.
With a good business plan in hand, you’ll be able to increase the confidence your lender has in your plan. You will be setting yourself up to be in a much better position to be approved.
Be Prepared with Collateral
Getting approved for a small business loan can be tricky, and you need to be ready to do anything to secure one. In some cases, you may have offer collateral in exchange for a loan. This is especially true if you’re a risky investment due to some factor.
Collateral can take many forms. It is an asset owned by the business, including but not limited to equipment, real estate, or inventory. If you fail to make your payments, the lender can seize this collateral.
Collateral is intended to give the lender more confidence that you’ll pay back your loans. It’s also seen as another way for the lender to make back their money if you can’t pay up.
Collateral isn’t always necessary, but it can help make your case seem more appealing to a lender. It can help mitigate the risk of taking you on.
How to Qualify for a Small Business Loan
There are a lot of factors to understand when it comes to understanding how to qualify for a small business loan. Being prepared when you sit down for a loan meeting can greatly improve your chances of being approved.
Want more financial advice, tips, or tricks? Check out our blog for more.