What You Need to Know When Applying for Funds
When starting a business, money is likely your greatest concern, especially in the beginning. There are so many costs to consider as a budding entrepreneur, including licenses and permits, advertising, equipment, inventory and commercial space, just to name a few. And even if you have an amazing business idea, there’s no guarantee you’ll qualify for the loan you need.
While traditional banks rarely extend loans to start-ups, they do provide them for ongoing businesses. Other sources such as online lenders may be more lenient with qualifications, allowing you to take out a loan for your new business if you have good credit and collateral. Regardless of the type of financing you pursue, the steps toward securing a small business loan tend to follow the same pattern. Here’s all you need to know about completing the loan application process.
Complete Your Business Plan
No lender will approve your small business loan without seeing your business plan. That’s because the bank’s primary concern is getting its money back plus a reasonable rate of return in the form of interest. As such, lenders want to feel confident your business will succeed, so it’s important to present a full-fledged business plan to prove you’ve carefully considered your idea and have concrete plans to make it a success.
Bankers are particularly interested in your marketing plans. Part of your business plan should include various marketing details, including competitors, market-related risks, pricing strategies and your advertising strategy. You also need to define your ideal customer and how you intend to make that customer happy with your products or services.
While the details of your business plan will vary, it should abide by the following outline:
Executive summary: The executive summary is a general overview of your business plan. This is where you want to summarize the most important parts so that the lender doesn’t have to read 20 or 30 pages to get the gist of your business. Although the executive summary comes first, wait until the business plan is finished before you write it.
Business overview: Your business overview should detail your products and services, your company’s ownership and legal status, how much money you need and how you intend to spend it, your company’s mission or vision and both your short-term and long-term business goals. Focus on at least one short-term and one long-term goal you can accomplish within one year, as well as two or three smaller objectives that can help you reach these goals.
The market: The market section of your business plan will describe your ideal customer and your findings on the market size. You should also analyze market segments in order to indicate which category your ideal customer falls under.
Industry trends: This part of the business plan should discuss local and global trends relevant to your industry. Now is the time to consider suppliers, costs and your company’s potential as a newcomer to the industry.
Competition: Discuss your major competitors, both locally and online. What are their strengths and weaknesses? What have you learned from researching how they market their business? What benefits do they offer and how can you match or beat those benefits?
Marketing and sales plans: Spend some time going over your competitive advantage in your business plan. What sets you apart from others in your industry? What will your marketing activities look like during the first few months while your business is getting off the ground? What’s your budget for those plans? Lenders like to see concrete numbers, so don’t be afraid to get specific.
SWOT analysis: SWOT stands for strengths, weaknesses, opportunities and threats. As such, a SWOT analysis is a structured planning method that evaluates each of these elements of your business. Completing a SWOT analysis may be difficult for start-up companies, but you can still determine what you have to offer, what’s holding you back and how you can take advantage of opportunities to meet your goals.
Operations: Every business plan should contain operations information, such as your business hours, how you plan to get reviews and what a typical day looks like in your company. Lenders will also want to know your location, why you chose it, whether you’ll do business online and who your suppliers will be.
Management and personnel: This part of your business plan should describe your management team and their roles in daily operations. If you’re just getting started, list the business’s owners and what part each of you intends to play in the business. You should also summarize your personnel needs, intended wages and hiring schedule.
Exit strategy: Banks want to know they’ll get their money back even if you sell the business. Discuss what your exit strategy is if you decide to sell, franchise or license the business to someone else.
Financial projections: Finally, your business plan should end with detailed financial projections. This section should include assumptions about sales growth, expenses and revenue, when you plan to break even, your projected net profits or losses, your credit policies and your expected debt. This information will help lenders evaluate your business’ potential and whether a small business loan from their institution will be a good fit for your needs.
Review Your Credit History
Now that you’ve completed your business plan, review your credit score and credit history. Lenders will use your personal credit history if your business is less than three years old or is still in the start-up phase. Request your credit report from all major credit reporting agencies and clear up any discrepancies. Write the agency a letter detailing any errors, and file a credit dispute report if necessary.
Most lenders want to see a credit score of around 700, but this isn’t to say that you won’t be approved with a lower score. Other factors they consider include your capacity to repay the loan, collateral you can offer to secure the loan, your own investment in the business and economic conditions. The lender will also make a subjective decision regarding your character, which is where your experience, education and references come into play. As such, don’t be completely disheartened if your credit history isn’t perfect. You might still stand a chance of obtaining the funding you need if everything else falls into place.
Visit a SCORE or SBDC Office
If your city has a local SCORE or SBDC office, stop by for advice from experienced executives. SCORE, which previously stood for “Service Corps of Retired Executives,” is also known as Counselors to America’s Small Business. As the nation’s biggest network of volunteer mentors and partner of the Small Business Administration, SCORE is an invaluable resource for budding entrepreneurs. Take a local workshop, register for a free webinar or view courses on-demand through SCORE’s website. There’s even an online library with resources dedicated to financing and loans.
Similarly, the SBDC (Small Business Development Center) provides assistance to small business owners and aspiring entrepreneurs. SBDCs are funded through a partnership with the SBA and are often hosted by top universities, so you’ll find many of the SBA’s resources available to you at your local office. If you can’t visit an SBDC in person, navigate to the Small Business Administration’s website and read up on funding programs. The free Lender Match tool helps connect you with participating SBA-approved lenders to get the financing you need.
Complete the Loan Application
After considering all your lending options, it’s time to fill out applications. Don’t expect a quick process, however, as applying for a business loan generally takes two to three months from the time you apply to the time to lender accepts or rejects your application. Most entrepreneurs fill out several loan applications in an effort to secure finances, so don’t feel disheartened if you’re rejected by your first lender.
Most small business loan applications ask the basics, including your business name, phone numbers, date of incorporation and legal structure (whether your business is an LLC, partnership or s-corporation, for example). After covering the basics, the application will ask about your type of business. This is where you’ll need to know whether your business has a code under the North American Industry Classification System (NAICS). Use the NAICS Search feature on the United States Census Bureau website to determine your code.
The loan application will also inquire about your products and services. Include a short explanation of what your business offers, but don’t go into too much detail, because this information is already explained in your business plan. Instead, focus on product keywords, your sources of revenue and the types of customers you expect to have.
When it comes to the finance section of the loan application, you need to enter your bank account information, including any recent deposit information. Existing businesses should include gross annual income for the previous year rather than expected income. The same goes for cash balance, debts, number of employees and other business-related matters.
Since startup companies won’t have any business financials yet, applicants should include a personal guarantee for collateral. The loan will likely include a section that asks if you want to pledge your accounts, inventory or equipment as collateral but weigh your options carefully before deciding how to proceed. Putting up collateral can help you get approved for financing, but it also puts you at risk. For example, if you put up your house as collateral and your business fails, the bank owns your home and you’ll need to move out. Some things, like your home or your children’s college education, just aren’t worth risking.
Most loan applications will then ask if you are in good standing with the local secretary of state. This means that the lender wants to know whether you’ve paid your business taxes and obtained the necessary licenses and registrations. If you’re just starting a business, make sure you’re properly registered before ticking this box.
The loan application will also remind you of your financial obligations should your loan get approved. Other questions pertain to your business’s ownership, your personal tax information, your marital status, what role your spouse will play in the business and whether you share ownership or own 100 percent of the company. Answer each of these questions to the best of your ability using clear, concise language. If you feel like you could expand on any of the questions in your business plan, revise the business plan before submitting it to the lender.
Set aside several days, at least, to complete your loan application. It’s always best to take frequent breaks and come back to it with fresh eyes to check for errors. Don’t just double-check your answers, but triple-check them, enlisting a second pair of eyes, if possible. If anything is missing on the application, even a seemingly small detail, you’ll likely be rejected or the application will be delayed by another few weeks.
Make an Appointment and Prepare Your Presentation
When you’re ready to present your business plan to lenders, make an appointment at your preferred financial institution. Put together a professional package complete with the application, your resume, your business plan and financial statements, including charts, spreadsheets and graphs.
When requesting an appointment with a loan officer, ask for plenty of time to pitch your business plan, display visual aids and answer questions. Be as detailed as possible while remaining concise and organized.
Since lenders can be subjective in the approval process, it’s best to overdress for the presentation rather than underdress. Keep the presentation brief by focusing on the executive summary and some meaningful financial projections. Practice your presentation beforehand and come up with a list of possible questions the loan officer will ask. Remember, you want to be prepared to answer these questions on the spot.
Even if you aren’t approved by the first lender, use your experience from the first presentation to make the next one even better.
If you’ve exhausted all traditional finance options and still can’t get the money you need to start a business, consider applying for a small business loan through an online lender. Online lenders tend to offer more competitive rates to help you stay ahead in your industry.