If you're relatively new to starting or running a small business, one of the most challenging and frustrating aspects of doing business is the seemingly endless flow of paperwork that comes with the territory. Choosing a business structure, incorporating, tracking expenses, maintaining a P&L, payroll, insurance, taxes... it's common to feel as though you're spending as much time filling out forms about your business as you do actually running it.
When the time comes to apply for a loan or line of credit, there's still more paperwork and fine print to wade through, and more information to gather. But your business, from startup through day-to-day expenses through expansion -- isn't always going to fund itself. Below, we share some tips to cut the loan process down to size.
Step One: Know Your Needs
Know Why You Need a Small Business Loan
Your lender is likely to want to know why you need a small business loan. Indeed, some lenders and guarantors, like the SBA, will only disburse funds to certain types of businesses, and/or for certain needs. Knowing what the money is for helps you (by guiding your research) and helps them (in determining your needs).
Know the Kinds of Loans for Which your Business Qualifies
Some loans are disbursed or rejected on the basis of your type of business, how long you've been in business, your ownership structure (special loans and programs exist based on race, gender and veteran status, among other things), geography, and the purpose of the loan.
Know How Much You Need
It's vital to borrow under the right terms, and to get the amount right the first time. Borrow too little and you end up taking out multiple loans, which can actively harm your credit. Taking too much, on the other hand, can mean longer repayment terms and higher interest rates, costing you more money in the long term.
Step Two: Getting Ready
Know Your Numbers
Nobody likes to be a number, but the fact remains that those numbers are the metrics by which your lender will determine your creditworthiness, your ability to pay, whether you qualify, and how much they're willing to lend.
The better you know your business by the numbers, the better you'll be able to shop for the right lender and make an intelligent case for your needs if questions should arise. At the very least, you should know your business's credit rating; for some types of businesses and business structures, or for businesses that are still relatively new, the credit scores of the business's principles may also be taken into account.
Debt to Income: This simple ratio can have a big impact. As a rule, no more than 33% of your business's monthly gross income should be allocated toward debt.
Time in Business: While this varies depending on the lender and type of loan, most lenders will require a minimum of two to three years' time in business to qualify for a loan. There are exceptions for some types of loans (especially those disbursed to startups) or certain non-traditional lenders, but these may require cosigners, collateral, or some other means to guarantee the loan.
Industry Risk: The industry to which your business belongs is rated on the basis of an SIC code issued by the government, and that risk level is one of the criteria that determines your creditworthiness. If your business is high risk some providers offer loans for businesses with bad credit.
Cash Flow: The lenders' logic is that businesses with better cash flow tend to do better at surviving market downturns. A healthy business is more likely to repay, and is therefore more likely to receive funding in the first place.
Know Your Lender
Depending on the lender and type of loan, the loan process, terms and conditions, types of collateral, and allowed loan use can vary widely. Relationships still matter as well. And of course, you'll want to know your options. These include:
Banks: Banks are often the first stop for businesses looking for money. While the borrowing requirements are typically more stringent, banks typically offer a wider array of loans and allied financial services.
Non-Traditional Lenders: This sector has exploded in the last decade. Their advantage lies in somewhat looser requirements for obtaining capital, but borrowers should be aware that origination fees and interest rates can be much higher than those offered by banks, especially for subprime borrowers.
Regional Lenders: Local banks, credit unions, and other types of lenders often foster the growth of businesses in their area, with special attention paid to underdeveloped areas and high-growth sectors.
Crowdfunding and Microlenders: Microlenders will offer working capital and other smaller loans to businesses looking to cover operating overhead and unexpected expenses, while crowdfunding sites can be an option for raising funds to prototype a product or bring it to market.
Step Three: Prepare Your Loan Application
If you've followed along up to this point and gathered the information already mentioned, congratulations. You've already put together the lion's share of what your bank will ask for. At a minimum, you'll need:
- Your business plan
- The business owners’ financials and resumes
- Financials, including your P & L, tax returns, bank records, balance sheet, and proof of cash flow
Understand each of these pieces. You may be asked to explain or provide further information at different points in the process, and it's difficult at best to clarify something about which you're a bit hazy yourself. Double and triple-check your application. Above all, assume nothing; your loan can be turned down for the smallest technicality or misinterpretation, leading to frustration and headaches later.
Three-Point-One: A Little Help?
You may find that you've done your best to prepare and still have questions. In that case, there are places to turn for help. Your bank or lender should be your first port of call, since they're the best-qualified to tell you what information they need.
If you're still in the planning stages, on the other hand, contact the Small Business Administration (SBA), SCORE (Service Corps Of Retired Executives), your local SBDC (Small Business Development Center), or -- for female entrepreneurs and business owners -- one of the many WBCs (Women’s Business Centers) across the country.
Operating your business can seem tedious, frustrating, and even mysterious at times. For the unaware or unprepared, the loan process can be all of those things at once. Luckily, the process is transparent and easy to demystify. A bit of knowledge -- of your business, your numbers, your lender and the loan process -- can go a long way toward making everything easier to understand and putting you on the right path toward getting the funding your business needs.