Even if your credit score isn’t in the 700+ range, entrepreneurs still have a shot a landing a business loan with exceptional terms. The key is to show banks or alternative lenders that lending to you is a safe, even advantageous, bet.
By Meredith Wood
Whether you’re a startup or established company, small business or enterprise, there are five things every owner should do to secure the best loan.
Prepare a Rock-Solid Business Plan
Before you ever reach out to a lender, you have to have a business plan that truly shines. Your plan needs to be robust—both comprehensive and extremely detailed. Don’t know where to start? Every stellar business plan should have many key components including a detailed summary and description, thorough market analysis, a well-planned strategy, and a clear view into future financial growth potential.
This will give you a chance to build a case that shows a lender you understand your business and why it will succeed—so they feel confident you’ll pay back your debt.
When it comes to laying out a financial plan, include as much information as you can to prove you know your numbers. If you’re an established business, include historical financial data for the past five years. Every business should provide forecasted balance sheets, budgets, and cash flow statements for the next five years.
This is only a very brief explanation of creating a business plan. SBA.gov has a helpful tool that can help you put together your own. It’s a good idea to have an attorney or CPA review your plan before submitting it to a lender.
Fix Your Credit Score
Check your credit report often and monitor for any changes or mistakes — it’s a good idea to know exactly where you stand well before you ever submit an application.
Though there’s no hard and fast minimum, your personal credit should be at least 550—and it’s even better if yours is above 700. If you’re on the low end or don’t meet that mark, there are things you can do.
First, find and fix any errors on your report. Credit bureaus can legally take up to 30 days to fix any errors, so give yourself a wide window between requesting a fix and applying for a loan.
If your report is error-free and still low, paying down credit cards or settling old debts can help raise your score.
Get all your paperwork in order
Bring all the information to the table before a lender has to ask for it. The bare minimum most lenders will ask for are the the last two years of income tax returns and at least three months of bank statements.
Also provide any contracts and legal documents pertaining to your business. They may want to see articles of incorporation, business licences or registrations, commercial real estate documents or leases, contracts with suppliers, and any other pertinent information.
It can’t hurt to be over-prepared, so if you don’t know if they’ll need a document, it’s a good idea to have it ready to go — just in case.
Choose the appropriate loan type and lender
For just small businesses, there are more than 44 different types of financing on the table, so figuring out the best loan for your business can make your head spin.
What you plan to use the money on and when will help you narrow down your options. For example, if you need, say, a new refrigerator or a handful of computers ASAP, equipment financing or a line of credit may be right for you. On the other hand, if you need financing quickly, steer clear of Small Business Association loans, because they require approval from both the SBA and lending institution. There are many options under each type of loan, so research, research, research.
Figuring out the loan you need will help you narrow down possible lenders. For example, small businesses may have better luck getting loans from small banks or alternative online lenders. A 2015 Federal Reserve survey shows that, since 2006, there has been a steady decline of big banks lending to small businesses which means you may have more luck thinking outside traditional lending.
Have a backup plan ready
It never hurts to have a backup plan. If you want to impress a potential lender, come prepared with proof that you can pay your loan back — with multiple repayment plan options. One plan may offer a longer repayment schedule or offer up collateral, even if it wasn’t part of the original application.
A backup plan can help if a lender contests points of your business plan and can add reassurance that your business is in growth mode.
Preparation is key to getting approved for a loan
Though you can’t guarantee you’ll get approved when you start the business loan application process, doing research and over-preparing can give you the best chances—and hopefully lead to more capital for your business.
Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more. Meredith is also the Senior Financial and B2B Correspondent for AlleyWire.