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9 Things Startups Must Know Before Approaching Lenders

9 Things Startups Must Know Before Approaching Lenders
Image credit: Catherine Clifford/Entrepreneur.com
Aisha Benson, the Vice President and Managing Director of Seedco Financial, talks to entrepreneurs at the America Means Business event in New York City.

If it seems like you're still swimming against the tide to find money for your small business, you're not alone. But there are preparations you can make as a business owner that will increase your chances of getting a loan.

"I want to dispel the myth that there is no money out there for small businesses," says Aisha Benson, vice president and managing director of Seedco, an alternative finance organization. As part of the America Means Business event in New York this week, Benson spoke to entrepreneurs about what they need to know before approaching a lender for a loan.

Here are quick tips from Benson to position yourself smartly:

1. Write a business plan. Vague ideas scribbled in your notebook won't impress lenders. For help with a business plan, Benson suggests starting with free templates available online. For examples, check out those available here or on the Small Business Administration's website. She also recommends contacting your local Small Business Development Center, or make an appointment with a SCORE volunteer. Once you have a plan, update it at least once a year, she says.

Related: How to Craft a Business Plan That'll Turn Investors' Heads

2. Organize your paperwork. Lenders have checklists of documents they need, like legal operating agreements, tax returns, and insurance papers. Have hard copies of these important business documents in one place so you can answer questions easily and promptly.

3. Determine how much money you need. Benson says lenders and investors do not like to hear "whatever you want to give me" or broad terms like "working capital," because that indicates disorganization. Know how much you need and what you are going to do with that money. Also, be ready to explain why you are borrowing it and how you are going to pay it back.

4. Be prepared to put your own skin in the game. Investing your own money into your business inspires confidence in lenders. Be sure you have documentation to prove exactly how much you invested.

Related: 3 Online Tools To Find Funding

5. Know your business numbers. It's fine to hire an accountant, but when you sit down with a lender you need to know what the line items on your balance sheet and income statement represent.

6. Be transparent. Don't keep secrets. Lenders will research your financial history. So, even if you don't disclose debt on your application, the lender will find it. "It only delays the process," Benson warns.

7. Ask questions about the process. If the lender conducts site visits, schedule one at a time when you are likely to have customers. If your business partner needs to be present, be sure that he or she is there. If your application goes to a credit committee, don't expect a decision overnight.

8. Read the fine print. In addition to understanding the interest rate, know the "all-in" cost of your loan: Ask about application costs, transaction fees, renewal fees, and any penalty fees.

9. Be yourself. "We want you to be honest and open -- that is about character," Benson says. "The investor is really banking on you." Especially if you are working with micro lenders or alternative lenders, if they're impressed with your character, they're more likely to work with you.

Related: 3 Rules for Successful Crowdfunding

What helped you the most to get a business loan? Share your approach and respond to other readers in the comments below.  

Catherine Clifford is a senior writer at Entrepreneur.com.

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