Five Essential Steps for Getting the Loan You Want
by Barbara Weltman
Published August 21st, 2007
Making sure you have the funds you need to start or grow your business is one of the most important things you can do as a small-business owner. Unfortunately, many loan seekers don’t do the preparatory work necessary for getting a "yes" on the loan application.
Step 1: Write your business plan. Whether you’re seeking commercial financing or a loan from an angel investor, you must be clear about how much you want, what you want the money for and how you plan to repay the loan. The answers to these questions should be spelled out in detail in your business plan. You don’t have to be a Hemingway to draft a business plan - use software or pre-formatted plans into which you simply plug your information (the writing is virtually done for you). For more information about writing a business plan, including links to commercial software, visit the SBA at www.sba.gov .
Step 2: Repair your personal credit if there are problems. Although your business is requesting the loan, your personal credit history is a key factor in whether a lender will approve your application. After all, in most cases, you must personally guarantee any loan to your business.
Contact each of the three major credit reporting bureaus to request a copy of your credit report (the same report that lenders will see). Under federal law, you’re entitled to a free copy annually.
*Equifax (www.equifax.com )
*Experian (www.experian.com )
*TransUnion (www.transunion.com )
Review all information to make sure everything is correct. If there are errors - such as old loans still being reported that you have satisfied or unpaid items that aren’t yours (they belong to the other Mr. Joe Smith) - you can have them corrected. Talk with the credit bureaus to find out what documentation is needed to update your files (it may be as simple as your writing a letter requesting the correction).
Idea: Build your business credit, separate and apart from your personal credit, to expand your borrowing opportunities.
Step 3: Fix your balance sheet. Yes, lenders do look at your balance sheet - the financial statement about your assets and liabilities as of a certain date.
You may need to pay off existing loans before the lender will consider your application for a new loan (i.e., you generally can’t pay off your current debt with a new loan).
Step 4: Find the right lender. Save yourself time and energy by submitting your application to the lender with which you stand the best chance of approval - a lender that aggressively supports small-business lending activities. It may be a commercial bank, a line of credit through a credit card company, or a private lender.
Important: If you’re looking for seed money to start a business, choose carefully since many lenders only deal with companies that have been in business for at least several years.
Ask around - for example, consult other small-business owners and your accountant - to learn which lenders are currently giving loans to businesses like yours.
Step 5: Put it all together. You’re ready to ask for a loan and you’ve found the right potential lender to talk to. Now you must complete the loan application. This entails more than filling in the blanks. You usually need to assemble:
*Financial information-balance sheets for yourself and the business, profit and loss statements, cash flow statements, and other numbers that the lender requests. For numbers on the projection of business activities, make monthly and quarterly forecasts for the coming year and quarterly and annual forecasts for subsequent years.
*Old tax returns, both business and personal - generally for each of the preceding three years.
*Other documents - leases, franchise agreements (if the business is a franchise), patents and other proprietary items, letters of intent from suppliers and manufacturers and any testimonials or scientific studies supporting your product or services.
Idea: Make a final check of your application package. It may be advisable to have your accountant or another numbers person review your application to help you present yourself in the best possible light.
Big Ideas for Small Business is a free monthly online newsletter from Barbara Weltman, author of The Complete Idiot’s Guide to Starting a Home-Based Business, Third Edition, and The Rational Guide to Building Small Business Credit. www.barbaraweltman.com
