As your business grows, you might find that you could use a loan to take advantage of new opportunities. The world of small business loans can be a complicated one to navigate. So we collected some expert tips on everything from building your credit worthiness to finding the right lender. Here are some best practices and common mistakes to avoid.
Do’s for Getting a Small Business Loan
Get a Separate Business Bank Account
Any lender who is considering grating your business a loan needs to first get a grip on your finances. The easiest way to do that is to have a separate account and books for your business.
Gerri Detweiler, education director for business credit marketplace Nav, said in a phone interview with Small Business Trends, “Findings from Nav’s Annual Business Banking Survey echo the importance of business checking accounts. We polled 648 business owners from across the U.S. and found that 70% of small business owners without a business checking account were turned down for a business loan in the past two years.”
Know Your Credit Scores
According to Nav’s Small Business American Dream Gap survey, small business owners who understand their business credit scores are 41 percent more likely to be approved when they go to apply for a business loan. Your personal credit score can also make an impact, as it shows lenders your financial health and habits when it comes to paying off loans or lines of credit. So check those scores and work to improve them if they don’t meet the minimum requirements.
Detweiler adds, “Make sure you’re aware of your personal credit score and your business credit score. We have about 30 different types of lenders in our marketplace, and a good number of them have a minimum personal credit score of about 550, and some are around the mid-600’s or higher.”
Look into All Your Options
There’s no shortage of lenders out there. Shop around online and compare rates and options before committing to one. You can even look into alternative lending options like Kiva.
Detweiler says, “Often times what happens is that borrowers will end up with the options that are best sold to them rather than the actual best option for them. So you have to be willing to invest a little bit of time examining the different options and find the best fit for you.”
Gather All the Necessary Documentation
There are several important documents you’ll need to have on hand as you go to actually apply for a loan, from your tax returns to loan history. Make sure to carefully review what is necessary for each loan you apply for and gather all the essentials beforehand.
Use a Business Loan Calculator
Some lenders won’t share the true loan cost with you as you apply. So to make sure you can actually afford to repay a loan, Detweiler suggests plugging the APR, interest rate and other associated costs into a business loan calculator like Nav’s. This can give you at least a general idea of the true cost and help you determine whether a particular loan is right for you.
Learn from Your Mistakes
According to the Nav survey, 45 percent of small business owners who are denied financing get turned down more than once and 23 percent don’t know why their applications were denied. So if you do get denied for a loan, see if you can get any input from the lender about how you can improve going forward, or have another professional look over your application to give you some suggestions.
Seek Out Expert Advice
There’s no rule that says you have to apply for a loan completely on your own. So why not take advantage of the resources available to you?
Robert Harrow, head of credit and loans at ValuePenguin, said in a phone interview with Small Business Trends, “There are SBA offices all around the U.S. that run initiatives that educate businesses on things like constructing a business plan and applying for a loan. They’ll even set you up with mentors who can provide you with the advice needed to get a loan.”
Don’ts for Getting a Small Business Loan
Have Assets Pledged to Other Creditors
Lenders don’t just run your credit to find a generic numerical score. They are also often on the lookout for any specific issues that make you a less attractive candidate.
Detweiler says, “Often times, lenders are really just looking for red flags that could be disqualifying for the business.”
Be Delinquent on Payments
Detweiler says that late payments can lead to other red flags that will drive away lenders. It doesn’t just hurt your credit score, but it can also potentially lead to tax and property leins that can greatly harm your chances of getting approved.
Be Unaware How Long You’ve Been in Business
One of the first things lenders look at when determining your creditworthiness is how long you’ve been in business. While you probably know how long you’ve been working on your business, some businesses don’t have any documentation to back it up.
Detweiler says, “It sounds obvious, but some businesses don’t have an official start date because they started slowly or started working on their business on the side and waited awhile before incorporating. So just make sure you have at least an approximate start date and have some kind of documentation to back it up.”
Only Apply at the Local Bank
Detweiler explains, “Lots of businesses have this dream about when they go to get a loan they just go into the local bank and they get the money they need with a great interest rate and great repayment terms. And if you can get it, that’s great. But a local bank might not be that interested in lending out $50,000 or whatever it is you need for your small business. And a lot of entrepreneurs don’t realize just how many different types of lenders are out there and how many different types of lending there are.”
Be Vague About What You Want
Within your credit application, lenders will ask how much money you want and what you plan on using it for. Being open ended about either of these items can give them a lack of confidence about your plans.
Harrow says, “I recently spoke with the NYC SBA and they said the most common pitfall for why businesses get denied is that they don’t have a good idea of what the funds will be used for or how much in funding they actually need. Lenders want to see that you have a specific plan in place.”
Waste Time Applying with Lenders That Don’t Work in Your Industry
On your business credit report, you should find an industry code that describes your business. Some lenders only lend to specific industries, and others might just have a few that they won’t lend to based on the risks involved. So make sure you check those items before you spend time applying.
Detweiler says, “Some lenders don’t want to lend to real estate businesses, for example, because that can be really tricky.”
Borrow from Disreputable Lenders
While it’s a good idea to expand your search to non-traditional lenders, it’s also important to look into the history and reputation of any company you intend to work with.
Harrow explains, “Sometimes when you broaden your search, you come across companies that are just looking to make a quick buck but aren’t interested in helping you at all.”
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