The good news is that the economy has seen an increase in small business lending – securing credit today is much easier than it was a few years ago.
Although the loan application process is still demanding, advanced preparation and having the right mind set can increase your chances of getting your loan approved. The following are some tips for entrepreneurs that want to apply for a small business loan successfully.
Assess your financial needs
Before you look out for a lender, thoroughly evaluate your financial needs. This will help you determine whether you really need the funds or not. To conduct this assessment, ask yourself the following questions:
- Does your business really need more capital?
- What is the nature of your financial need?
- How urgent is the financial need?
- For what purposes will the funds be used?
- How does your need for funds mesh with your business plan?
#1 criteria to Apply for a Small Business Loan
"Traction" is a term that lenders and entrepreneurs use a lot. In essence, if you have paying customers already, you have traction because you've proven that your business model will actually work. Without traction, you don't stand much of a chance on getting that loan. So first things first, figure out a way to prove your business model in the real world and not just on paper.
Get ready to share all your financial information
To increase the chances of getting your business loan approved, supply the lender with all your personal financial information and your business’ financial background. This will help the lending institution to get a clear understanding of your financial situation, reducing the time needed to evaluate your application.
To have all the needed financial information ready, you should consider hiring the services of an accountant. The lender is going to want to see actual financial statements, or at the very least forecasted ones if you haven't started your company yet. If you don't know how to put together a balance sheet and an income statement, you won't get your loan. The lender will also want to see a cash flow forecast that is supported by as many facts as possible. Be realistic in your forecast and show that you've done your homework. I can't tell you how many small businesses I've seen applying for loans that have forecasted $5 million in net cash after their first year in business. Hmmmm.......
Before you apply for a small business loan, shop around and make a list of at least five potential lenders. This will not only help you get the best rate, but also help you learn from your mistakes – learn from one lender’s feedback and adjust your approach with the next. Don't apply with too many lenders though. Do that, and you'll put a dark cloud over your credit score.
Provide detailed information
When you apply for a small business loan, show the lender exactly how much you need and how you will use the requested funds. Financial institutions love specifics and attention to detail.
Seek out assistance
To increase the chances of loan approval and quicken the process, seek assistance from institutions like the SBA (www.sba.gov). SBA lenders are a great resource for the small business sector.
Although there are many types of lenders (local, national and international), local lenders are always the best when it comes to small business lending. Local lenders will readily appreciate how your small business works.
Tip: To please a local lender, demonstrate your involvement and commitment to the community you live and operate in.
With the above tips, applying for a small business loan should not be a nightmare.
Remember, each loan program has its own eligibility criteria and application process. However, as you prepare to submit your application, you will need to gather and prepare similar documents.
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