Updated June 21, 2018.
The time has come to expand your business with new employees, a larger location or a new product line. It’s an exciting time, but stressful because you’re not sure you have the cash reserves to manage the expansion.
For many small businesses, this situation calls for a small business loan: a cash infusion that pays for itself, plus the interest, with the new opportunities and extra income it allows you to create.
Many small business owners, however, are new to small business lending. Though they’re familiar with personal loans, they only know the basics of small business loans, working capital and lines of credit. For those who “resemble that remark” – and for more experienced folks who would like a review of how to get a small business loan – here is your list of the top five small business loan requirements to get the best possible small business loan.
1. Strong Credit
The bad news about small business lending is it can be hard to qualify for the best rates and deals. The good news is this decade has more options for good small business loans than at any other time in history. You can choose between platform lending, traditional loans (like from a bank) and a variety of hybrid options available from local vendors or via the internet.
This flexibility doesn’t mean your company shouldn’t look as good as possible on paper. Your FICO credit score will figure heavily in any lending decision, so (if time permits) spend time grooming that number in the months prior to applying. Research what other metrics the lenders you want to use, and groom them as much as possible, too.
If you have a major ding in your credit, like a repossession or string of late payments, be prepared to discuss them and why things will go better in the future.
However, some lenders may look at more than just your credit score. If your credit score isn’t as strong as it could be, but you have a variety of other factors to help strengthen your business, include those as well. Some online lenders like to look at those to determine the overall health of your business – they know you’re more than just a number.
2. Solid Business Plan/Gather Documents
Part of understanding how to get a small business loan is ensuring you have a solid business loan. You should have one of these anyway since a strong business plan is a prerequisite for stellar business success. Traditional lenders will expect to see an updated, professionally prepared business plan as part of the lending process. Lacking one tells them you’re not ready for the “big leagues” and are a bad credit list.
Though some platform lenders won’t insist on seeing your formal business plan, similar documents about your social presence, industry statistics and unique market advantages – all of which are part of a comprehensive business plan – will go into decisions about what to lend you and how much it will cost.
Either way, get a business plan together and your documents. Those documents can include:
- Personal and business income tax return
- Personal and business bank statements
- A photo/copy of your driver’s license
- Commercial leases/Business licenses
- Articles of incorporation
- A resume that shows relevant management or business experience
- Financial projections if you have a limited operating history
3. Compelling Personal Résumé
Traditional lenders want proof that the people responsible for running a business are qualified to do so, and part of that proof will be seeing the résumés for you and other principles like owners and executive officers. This résumé should be as solid, well-edited and up-to-date as any résumé you’ve ever sent out.
Consider: The purpose of a résumé is to get you the job you want. The purpose of this résumé is to get you the job of running the company you want, instead of the company you have.
Platform lenders don’t look at your traditional résumé, but they will look at your business’ curriculum vitae in terms of performance metrics and social sharing. Take time to groom those items as substantially as you would a regular résumé.
4. Bulletproofed P&L Statements
Like your business plan, you should have these anyway. You should be using your profit and loss statements as part of a robust monthly “vital signs” check for your business. If you’re not doing them, dig into your accounting software for half an hour. You’ll find a tool that compiles P&Ls from your records. If you’re not using software to keep track of your financials, get started on doing that.
Lenders of all stripes are looking for three things in your P&L: reliability, professionalism, and ethicality. We’ll break them down:
- Reliability – They want evidence that you will be able to make your promised payments, based on enough cash flow to cover the loan. If you don’t, the lender will assume that lending you money is too high a risk.
- Professionalism – Lenders presented with incomplete, inaccurate or hastily prepared P&L statements will assume that your business is similarly disorganized.
- Ethicality – If you “fudge” your numbers to look better and get caught, you are done with that lender. The decision makers will assume that you cut ethical corners in other places.
5. Knowledge of the Loan Needed
This is actually the first of the small business requirements that you should address, but we wanted to mention it last so it would be the freshest in your mind. Lending isn’t what it used to be – a situation where you went to a couple of banks, all of which offered the same basic products, and hoped they would agree to give you a loan.
Modern small business lending includes a wide array of traditional, platform and peer-to-peer options with wildly varying qualification requirements and rates of interest. Before you start working in earnest on the other four requirements for your loan, decide what type of loan best fits your business. That way you won’t waste time and effort preparing the wrong documents.
Small business loan applications are becoming more simple and streamlined, enabling small business owners to access the funding they need. Dig into your research, find your best fit and start applying!