Despite reports saying that banks are now becoming more amenable to lending money to small business owners, the sad truth is that it’s never easy to get a loan. A lender can be one of the most frustrating and most vexing minds to figure out. That’s why some people say that banks only lend money to those who don’t need it.
Nonetheless, as a small business owner you probably don’t have much of a choice. You need money to cover your operational expenses or to fuel the growth of your company. Without additional cash, you may not survive for long. Business is a harsh Darwinian environment, where only the adaptable survive. It’s sink or swim.
So if your business needs a loan, you need to know how to approach a lender to increase your chances of getting approved.
Are You Credit Worthy?
One of the first things that a lender will want to know is who you are. They won’t just look at the viability and profitability of your company. They’ll look at your credit history and financial status to see just how reliable and trustworthy you are as a borrower.
First they’ll check your personal credit score. At the very least, you need to have a score greater than 650, but if it’s less than 700 then the loan is far from guaranteed. For most lenders, a score of 700 is actually the minimum they’d consider. They’ll also take a look at your personal debt to income ratio. Your payments for personal debts should not be more than a third of your gross monthly income.
Then they’ll take a look at how well your business is doing. You should have be in business for at least two years, and your company should have a reliable record of incoming accounts receivable. Your cash flow situation will also be scrutinized (the higher, the better), and the riskiness of your industry will also be part of the evaluation. Some types of industries such as restaurants are seen as riskier than other types of businesses.
Approach the Right Lender
You can approach commercial banks, but there are other institutions which you can approach for a loan as well. Some banks focus more on businesses in a certain geographic area, while others specialize in particular industries.
You can probably go online and do your search there, as you can find a wide variety of lenders to choose from. But you may want to start with your own bank. Banks are more likely to approve loan applications from people they know. If they can’t help, they may be able to recommend a more suitable lending institution that fits your needs.
Prepare the Loan Package
The loan package usually includes your resume and your business plan. This may also require your financial results and projections, such as your cash flow statements, balance sheet, and profit and loss statements. Your personal financial info will also be required, and that includes your tax returns for the last three years.
After that, you need to wait for a month or so, although you can call once a week for a status update on your loan application. Don’t get frustrated, even if a lender who loans money to small business owners asks for more documentation. This happens all the time and yes it can be very annoying.