Applying for a small business loan can be difficult if you don’t know how to go about it the right way. Regardless, of if you require a loan to purchase real estate, equipment or use as working capital the process is pretty much the same. You will be required to do much more than simply fill out forms. You will need to impress the banker with your loan application in order to get the loan.
Your story is very important
The loan request process has four important phases i.e. purpose analysis, source of repayment analysis, loan management and loan structure. These four phases of the loan process align directly with the five ‘C’s of your credit i.e. the character of the borrower, the condition of the request, the capacity of repayment, the collateral of the borrower and the capital. So, in a nutshell it boils down to the real story behind what your business is all about. Lenders want to know everything in detail since it will help them decide if this is the right investment or just a sloppy risk. This story will have to be effectively communicated via a well drafted business plan which needs to answer every question related to all 5 C’s.
Collateral and Paperwork
The recent credit crunch has changed the lending landscape quite a bit. This being said things have changed for small businesses as well. Small businesses that managed to survive the recession by just focusing on providing great products, reining in their expenses and building cash reserves are now looking to expand. Banks don’t see these types of businesses as being high risk but still remain cautious. Today, more paperwork is required in order to show the business’s capacity to pay back the loan. Also, more lenders require collateral than they ever did before. While, you may not like to put your possessions on the line to get a loan it is probably the best way to get one at a decent interest rate, plus it improves your chances of getting a loan. If you think that putting your property on the line is risky then chances are that the bank too sees your business as being risky. That being said if you don’t have collateral make sure the other 4 C’s are ironclad.
Speak to your accountant
Usually startups require funding to support them for 36 months. How much do you need? What is a realistic figure? If you have been putting off your applicant because it always seemed like something that you couldn’t handle then it’s time to call your CPA. Work with your CPA and develop a scenario and financial statements which then support your need for a loan.
Beef up your credit
You should have good credit! This is one of the 5 C’s of credit we discussed above. There are numerous things you can do to improve your credit but you first need to find out what your credit rating is. If it requires improvement you can chart out an action plan to improve it accordingly.