In a perfect world, every entrepreneur would have the resources necessary to transform a killer business idea into a smashing success. However, as you know by now, that’s not how it works.
In fact, having a great idea is only part of the equation: At some point, most entrepreneurs need a small business loan. Unfortunately, however, getting approved for a loan can be challenging if you don’t have all of your proverbial ducks in a row.
Five tips for getting approved
When it comes to getting a small business loan, you have to put yourself in the shoes of the bank or financial institution that you’re interacting with. If you were in their role, would you feel confident loaning money based on the set of circumstances and factors an applicant provided, and the interview process? Once you flip the script and look at things from their perspective, you should be able to see your situation in a less biased light.
That being said, here are a few tips for getting approved.
1. Start the process asap.
You aren’t going to walk into your local bank, fill out an application, and get approved for a loan on the spot. The approval process can take weeks, if not months to unfold. That’s why it’s best to start the process as soon as you can. Don’t wait until you need the money or you may end up with your back against the wall.
2. Deal with your credit history.
While you may desire separation between your business and personal finances, lenders will factor in your personal credit history when determining your risk level as a borrower -- there’s simply no way around it.
If you’re worried about this part of the process, focus on some ways to improve your credit score. According to Credit Sesame, your credit score is made up of the following five factors: payment history (35 percent), credit utilization (30 percent), credit age (15 percent), account mix (10 percent) and credit inquiries (10 percent).
As you can see, payment history and credit utilization make up the bulk of your score. By paying bills on time and using less of your approved credit line, you can bump your score up a few points in a matter of months. Realistically, you’re going to have trouble getting a small business loan from a traditional lender if you have a score of 660 or lower. Ideally, lenders want to see a score of 720 or higher.
3. Have a detailed plan for using the money.
When speaking with a lender, be very clear about how the money will be used. Giving some vague or general response about growing your business isn’t going to work. The lender will want to know exactly how the money will be used in order to determine the feasibility of your application.
Every business is different, but a few of the smartest ways to use a loan include an inventory purchase, business expansion, administrative expenses and capital investments. You may also choose to refinance or pay down debts, but lenders won’t always look at these uses with high regard.
4. Be organized and over-prepared.
Organization plays a key role in whether or not you’ll be approved for a small business loan. If the lender asks for a specific piece of information, you need to be capable of providing it in a timely manner. A lack of organization shows that you’re unprepared and risky.
The best thing you can do is over-prepare ahead of time. By having ready every possible piece of information or documentation that your lender could want, you can wow him or her with your efficiency, and take control of the process.
5. Get advice from experts.
Asking a lender for $100,000 to grow your business is one thing. But totally different is setting up a meeting and explaining that you’ve met with your financial advisor, accountant and board of directors, who have determined that you need $103,000 to expand your production facility and lower your cost of goods sold.
As mentioned, lenders want to see a specific plan. They also want to know that you aren’t acting alone. They like to see that you’re communicating with experts in your field and fully understand the situation.