How to Help Clients Get a Small Business Loan

With the ongoing coronavirus pandemic, many small businesses are in dire need of additional capital to survive. The federal government has implemented the Paycheck Protection Program to offer loans that, under the right conditions, may not need to be repaid. Additional federal and state relief programs may also be available. These programs are all changing rapidly, and business owners should check with an accounting professional and the Small Business Administration to see if they qualify.

The following advice focuses on more traditional small business loans that may be needed during non-pandemic times.

For many small business owners, the thought of applying for a loan or other form of credit can be daunting. Nevertheless, it is often necessary when opening or expanding a business. In ideal situations, entrepreneurs should not be seeking a loan because the business is having trouble with cash flow or low revenues. If this is the case, you first need to identify why your business is struggling and try to fix those problems before seeking funds, if necessary.

8 Tips to Get a Small Business Loan

Getting a small business loan or a line of credit is similar, in some regards, to seeking a personal loan, but there are also several differences. While credit-worthiness is a significant factor, so too are your business relationships with vendors and other creditors. The following tips can help you prepare for the process and improve your chances of securing the loan you need.

1. Have a Business Plan

2. Have Solid Financial Statements

3. Create the Proper Business Structure

4. Collateral May Be Required

5. Be Truthful

6. Know Your Credit Scores

7. Do You Need a Loan or a Line of Credit?

8. Find the Right Type Lender or Institution

1. Have a Business Plan

Whether you are just starting your business or looking to expand, it is important to clearly explain your goals to potential lenders. Having a business plan shows that you have thought out various aspects of your business, including potential revenues and expenses, with benchmarks for income and growth. It will also show a clear path to repayment of the loan.

A business plan demonstrates your knowledge of the industry in which you do business and your competitors. The plan should also clearly identify the purpose of the loan. Most financial institutions will require a business plan, as will many individual angel investors.

2. Have Solid Financial Statements

For existing businesses, potential lenders will want to assess the fiscal strength of the entity. A CPA or other public accountant can assist in developing a set of financial reports, including a balance sheet with assets and liabilities, an income statement, cash flow, equity statement, profit and loss, and additional information. Your accountant can also help produce projections for future income and expenses. Lenders may also request up to three years of the applicant’s tax returns.

3. Create the Proper Business Structure

The potential lender, whether a bank or other organization, will want to see their investment protected, which means they will want the business to be properly structured. The smallest business type is a sole proprietorship, but this may not be sufficient to receive a loan based only on business credit. In this case, the loan may be secured against the owner’s property, which is not ideal. A more appropriate business structure, in this case, would be an LLC, partnership, or corporation.

4. Collateral May Be Required

In addition to a business plan that shows potential for profit, the investor or bank will want some way to recoup their loan if you default. Collateral often includes physical assets such as machinery, real estate, or inventory items, or non-tangible property such as accounts receivable. The use of any collateral will be clearly defined in the loan documents.

5. Be Truthful

According to the Small Business Administration, the top reason for business loans being denied or delayed is because of incomplete information. Whether you meet with a loan officer in person or collaborate online, provide all of the information they request, including honest business references and financial details. If providing documents digitally, follow up with a phone call or email to the loan officer.

6. Know Your Credit Scores

Whether your business is set up as its own entity or as a Schedule C (sole proprietorship), potential lenders will most certainly check your personal and business credit scores in order to assess your reliability and timeliness with repayments. Individual credit scores in the U.S. are maintained by three credit bureaus: Experian, Equifax, and TransUnion. A personal credit score of around 700 or higher is considered good.

Business credit scores are compiled by Dun & Bradstreet, FICO, and Experian. “Good” business credit ranges vary between the major credit bureaus. For both individual and business credit, potential lenders will also look at your debt-to-income ratio, which shows whether you can afford a loan. They will likely also examine your cash flow, time in business, and industry risk.

7. Do You Need a Loan or a Line of Credit?

If your business plans require upfront payment of one-time expenses—such as purchasing retail or manufacturing equipment or expanding a building—then a loan is likely the best fit. If, however, you need recurring access to credit for inventory or routine costs that will be covered in full within a short (one to three-month) time frame, then a line of credit is more appropriate. As an alternative to traditional loans, lines of credit can also be secured with the company’s accounts receivable.

8. Find the Right Type Lender or Institution

Depending on the type and amount of loan, or line of credit, you need, there are various types of potential lenders. While commercial banks are best at providing traditional financing, they are also the most rigid when it comes to credit scores, strong business financials, and collateral. There are also local and regional community banks and credit unions, as well as alternative lenders, that can offer loans or a line of credit against your receivables.

For some businesses, web-based micro and social lender networks can be a good fit. Take a look at Kickstarter and IndieGoGo.

Improve Your Chances of Obtaining a Small Business Loan

Overall, your ability to obtain financing will depend on many factors, including credit-worthiness and business history. However, you can improve your chances by being prepared, having a solid understanding of the industry you are in, preparing an in-depth plan, and providing potential lenders with the information they request.