5 Keys to Securing a Business Loan in 2018
Before a business owner applies for a small business loan, there are a number of things to prepare. Securing financing is one of the most critical elements for the success of any company. Being diligent about the preparation will smooth the process and save time in the long run. And just about every entrepreneur is not strapped for time.
Here are five steps to readying your company for a small business loan application.
Step 1 – Build a Better Business Credit History
Even if you have cash on hand for petty purchases, put them on your business credit card and then pay them off on time in full every month. Not only does this establish a track record of timely payments, it also provides the opportunity to build up rewards points on the credit cards. Many credit card issuers offer cash back on purchases. Take advantage of those opportunities – it’s like buying supplies with a discount.
Step 2 – Improve Your Personal Credit Score
If you are considering applying for a small business loan, now is not the time to open a personal credit card. Two important aspects in determining a credit score are timeliness of payments and credit utilization (the amount of available credit currently in use). Having many credit cards – major cards, such as MasterCard, Visa and American Express, along with store cards – open at the same times will hurt your score. Try to pay off the smaller balances, but do not close the accounts. Take measures to address the larger debts quickly and consistently and try to pay them off in full when possible. At the very least, pay them on time and meet the minimum payment amount.
Step 3 – Submit All Documentation Required to Complete the Loan Application
- Loan Application Form: Lenders have invested in technology that enables online submission of small business loan applications. Banks expect borrowers to provide personal information, including current and previous addresses, aliases, criminal record (if any), educational level, etc.
- Business Plan: A well-written business plan provides a roadmap and outlines how the company will get to its final destination. Elements include a one-page Executive Summary that explains the firm’s business goals, operations, competitive landscape, key offerings, sales marketing efforts, management team experience, and revenue model. (It may be the only page of the business plan that a loan officer will read.)
- Personal Credit Report: Lenders will review personal credit reports as part of the application process. Blemishes on a credit report can hurt your chances of securing a small business loan. If possible, address and fix any discrepancies before applying for a business loan.
- Business Credit Report: For existing companies, a business credit report must be part of the loan application submission. A score of 650 or higher is considered a good one, while a score of 600 or lower may prove challenging when trying to secure capital from a bank. In such cases, alternative lenders may be the only route to go.
- Income Tax Returns: Lenders will almost always require personal income tax and business income tax returns for the previous two or three years. For startup businesses, borrowers’ personal returns will carry a lot of weight.
- Financial Statements: Lenders will require profit and loss (P&L) documents, cash flow statements, and a balance sheet.
- Collateral: Secured loans require collateral, while unsecured loans do not. Loans for large amounts of money typically require a substantial amount of collateral. Lenders will ask the cost/value of personal or business property used to secure a loan.
- Legal Documents: Franchise agreements, articles of Incorporation, copies of contracts, etc.
Incomplete loan applications is the most frequent cause of small business loan rejections.
Step 4 – Establish a Legal Business Entity
Establishing a legal business entity demonstrates an owner’s seriousness. The type of entity can be a C-Corp, S-Corp or LLC. Each type has its own pros and cons relating to taxation. Whatever the format, it is important to separate the business entity from personal assets.
Step 5 – Build an Online Presence
To remain relevant, all companies — even mom-and-pop shops — need to establish an online presence. When a bank officer takes a look at a small business loan application, he will do what most people do — look for an online presence, which adds credibility. One does not have to be a tech whiz to do this. For instance, Facebook enables businesses to set up pages for free, and many companies use their Facebook business pages as their primary web site. With 1.86 billion global users, Facebook can be a powerful force in helping to spread the word about your company.
- Select a name for your page and a blurb about your business
Use the “About” section to tell people a little bit about what your business does.
- Add a profile photo and a cover photo
Choose photos that best represent your business. Images can include your company logo and an image of your store or products.
- Add a call-to-action
Direct your page visitors to do something, such as “liking” the page, visiting your website, or calling the company.
Once established, update the Facebook page regularly with posts, special offers, photos, videos and special events.
Wix.com allows businesses to set up free and low-cost websites. It is an online web development platform that allows users to create web sites and mobile sites on their own. Users can add social plug-ins, e-commerce, contact forms, and e-mail marketing elements by using Wix and third-party developed applications. Business owners can purchase premium packages to establish their sites to their own domains (ex: removing the wix.com URL), remove ads, and include e-commerce capabilities.
Businesses should also be active on Twitter, Instagram and LinkedIn, also. If you aren’t tech savvy or simply don’t “get” social media, hire a public relations firm that specializes in small business marketing or – if you are on a really tight budget – find a college or high school student to help.