12/06/11

7 Things to Do Before Applying for a Business Loan

Note: This is a guest post by Jenna White, an author who writes on the topics of business, marketing, credit cards, and personal finance. Additionally, she works for a website that focuses on educating readers about credit card clauses to avoid. Below is Jenna’s opinion and doesn’t necessarily reflect the stance of Lendio.

7 Things to Do Before Applying for a Business LoanSecuring capital often comes down to having the right preparation. You might have good revenues and decent credit, but without what’s below, you still might not get business financing.

1. Start with a business plan

The first thing you will need to do if you want to convince a lender to give you a business loan is to write up a business plan.

Lenders will want to know that you are running a credible business, and that you have the knowledge and skills required to grow your business into something great. Include absolutely everything that has to do with your business, including your goals, competitors, past and projected revenue and expenses, market analysis, and how you intend to grow your company. Show why you are the best person for the job, and when you have completed all of that, write an executive summary that will draw the lender into your vision. This will be the first thing they read, and it could be the last if they are not immediately interested.

2. Prepare financial statements

As I have said, you will want to include any financial statements you can provide for the lenders, both past and future. Come up with a plan that you will follow, and show projected numbers so that your lenders can see your goals clearly and know that you will be able to make enough money to pay them back. Include your cash flow statements, income statements, and balance statements for the past three to five years, and show your estimates for these statements for the next few years, taking into account all seasonal changes in your business and how you will use the money you are borrowing.

3. Clearly state the purpose and amount of the loan

When you have completed the financial statements and your business plan, you should have a clear idea of what you want to accomplish with the loan and how much you will need to reach your goals. If you are able to clearly state your goals on paper and in person, it will be easier to explain exactly what you need to lenders. Identify what pieces of equipment you will need, the marketing strategy you will implement, or whatever else you will buy with this loan, and research the best price for each of these items. Show this research to the lender so they see that you are taking this seriously and you aren’t trying to take the easy route.

4. Look into your personal credit history

You will want to take a look at your credit history before you apply for a business loan, especially if your business hasn’t had time to be able to build a credit history of its own. The lenders will want to be able to know that they are lending money to a person who is financially responsible, so if your credit report leaves something to be desired, you may want to wait a while and build up your personal credit before you apply for a loan. Many lenders will also want to see your personal bank statements and tax returns for the last year, so you should keep that in mind for the year before you need your loan.

5. Know your capacity for collateral

Some kinds of loans will require you to put down some form of collateral. If this is the type of loan you choose, you will need to have a good idea of how much your form of collateral is worth. Lenders will want to know this number and you will want to know that you have something of tangible value to secure the loan. Just make sure that you’re not going to default on the loan and lose whatever property you use.

6. Understand what the loan will cost you in the end

You will want to know exactly how long it will take you to pay off your loan. Find out what kinds of offers various lenders will be able to give you, and use those interest rates and fees to estimate your payments. All of this information should be included in your financial statements, but you should also add up all of your payments to see how much the loan will cost you. Know all of the terms and conditions attached to each loan offer before you decide which one will be best for you, and be able to show the lenders that you are a good investment.

7. Research your borrowing options

In order to find the bank or lender that will offer you the best deal, you will have to do a lot of research. Don’t fall for large banks that seem to have great offers before you look into smaller banks and credit unions first. They may give you a better chance of getting approved. You may get turned down, but keep trying. If you continue to adjust your plans and research all of your options, you are sure to find someone who will give you the loan you need. This is also a benefit of Lendio. If you sign up for a Lendio account, you can compare and apply to dozens of lenders that will be a great fit for you — all in one spot.

Get more small business tips from Lendio.

About the author

Comments

  1. Quick question…. Does one need a business plan even if the company has been in existence some time? Why would banks/lenders demand a business plan, if the company has been operational for a while. I am not arguing about the need for a business plan. I am just curious whether banks want to see business plans for existing companies as well.

    • Teras, I would say, probably. An updated business plan that’s targeted directly to a lender, showing projections, proforma, revenue, etc., might be what will get you over the hump so you can qualify for financing.

      Lenders want to know you’ll pay them back. A business plan that shows you’ll pay them back is always a good idea.

    • Most knowledgeable lenders like to limit their risk. It’s not like is used to be, many established companies are either non-existant or having hard times, because of this the lender must know where the company is going in the future. It’s like a cross country road trip. You need a map or GPM to get you from point A to point B. A good BP will give the lender a feeling of confidence in your ability to plan, direct, and accomplish the co’s goals. P.S. Stay away from “canned software” business plans. They tell the lender that you don’t know how to plan, lack creativity, don’t have time to “think things out.”

  2. Number 8. Try to establish a relationship with a smaller bank in your community and try them first. I have found the larger banks are more willing to dole out lip service then money at this point in time. As long as you don’t actually NEED the money, you can probably get all you want!
    Good article, though! A lot of small business owners, myself included, are constantly looking for lenders willing to actually work with small businesses.

    • Steve, isn’t that the truth? When we were raising capital in 2009 (when banks stopped lending period), I remember a conversation with a business banker from a very large bank in the U.S. I don’t know if I should mentioned the name here, but I won’t for now. The conversation went something like this:

      Banker: “In order for you to get approved for a loan with us, you will need to provide us with cash, investments that can be liquidated quickly if needed, and gaurantees from people who can provide those, if you don’t have enough.

      Me: “OK! What is the interest in that you will charge?”

      Banker: “Since you are a startup and high risk, the interest rates will be in excess of 15%.”

      Me: “But, I am backing this loan up with cash and liquid assets. The way I see it, your bank has almost no risk! Am I correct?”

      Banker: “Hmmmm.. You are correct, I guess.”

      Me: “So, if I had all those funds, why would I borrow from you? Also, if I WERE to borrow from you, why is your bank charging such high interest rates on a risk free loan.”

      Banker: “I can’t answer your questions. I just do what I was told to do by my manager.”

More like this