Published: 2016-02-26   Views: 2449
Author: Bizangel3
Published in: Business

Business loans were so easy to get before the Great Recession.  Now, banks and lending associations are stricter when it comes to approving business loans. But they all still need to loan money to small businesses. So it is not impossible to get the funding source needed for a start up or for business growth. What is important is for entrepreneurs to know how to apply for a business loan and get the best terms.  

Here is a 7 step practical guide on how to get a business loan:

Step 1: Start preparing before the loan is needed. It is critical to build a relationship with the the lender before the business actually needs the loan. Know your key contacts and let them know about your company before asking for anything. Remember, people do business with who they know, like, and trust.

Step 2: Decide what the money is needed for. There are good reasons for needing a loan, like financing a piece of equipment, real estate, long term software development or large seasonal sales variances. There are also bad reasons like financing ongoing losses, office build outs, or acquiring non-essential business assets. Make sure that your business loan is built on good reasonable terms.

Step 3: Determine the exact amount of money the company needs.   A lot of small businesses have made a common mistake of not asking for large enough loans.  Underestimating can lead to problems with a lack of working capital sooner than planned. Overestimated amounts can make lenders question the business owner’s assumptions and credibility.  Make sure you research and create a strong business plan with a budget with financial projections, such as profit & loss statement and a cash flow statement.

Step 4: Know the score. Lenders still look at personal credit scores as a way to judge the reliability of the principals who are borrowing the money. Know what lenders look for and how the scores compare to those expectations.

  • Credit score: A credit score of above 650-700 is considered acceptable, but does not guarantee a loan. Most lenders will look for a credit score that is at least in the 700-800 range.
  • Debt to income: Personal debt payments should not be more than 33% of gross monthly income.
  • Time in business: Lenders give unsecured working capital lines and term loans to businesses which are over 2 years old and have a reliable record of incoming accounts receivables.
  • Report on industry risk: Industry risk is rated based on the government SIC codes which are ranked. A small business owner needs to find out how their industry is rated.
  • Report on cash flow: The higher the operating cash margin, the better the chance is for a business to survive slower market conditions and ensure long term survival and growth. In the final analysis, most lenders give money based on the company’s cash flow since it measures the ability to successfully repay the loan.

Step 5: Research on a lender that best fits the business’ needs.

  • Commercial banks: This is best for traditional loans that fall into the strict parameters discussed.
  • Non-bank lenders: These are increasing in record numbers for lenders looking to get a higher return.  
  • Region specific lenders: Local community banks and other lenders that have an interest in economic development in a certain geographic or industry area.
  • Micro and alternative lenders: Crowdfunding sites can be helpful for capital needs under £10,000. Personal loans can also be sourced from peer to peer lending sites. 

Step 6: Prepare the paperwork to be submitted in order to apply for a loan. It generally includes the following documents:

  • A business plan
  • Business owners’ and partners’ resumes.
  • Financial results and projections such as Profit & Loss, Balance Sheet and Cash Flow Statements.
  • Personal financial information
  • Three years of tax returns.

Some lenders may even look at the personal social media accounts  as part of their research. The application documents vary depending on the lenders requirements. 

Step 7: Expect to get an answer within two to four weeks. Check in each week for a status. It is typical that the lending institution will need additional documentation.

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