Planning is the key to getting that business loan you need for starting a business or for business expansion and change. Justin Pritchard, Guide to Banking, says, "Working with banks on small business loans can be easy or difficult — it just depends on how prepared you are." Preparation and planning are essential to business loan success. The key steps to getting a business loan are:
Gather and Update Business Records
If you have an existing business, a lender will look at your current business records carefully to help answer questions about how your business is doing. Include information on:
- Business Credit, including business credit reports, Dun & Bradstreet information, or other information that shows the status of your business credit.
- Tax Returns: Federal tax returns for your business for the past three years. If you don't yet have three years' returns, provide as many as you have.
- Profit and Loss Reports and Balance Sheets, going back at least three years, or for as many years as you have these
- Current Debts: A list of business debts and your payment history on those debts.
- Business Assets: A list of your business assets and current fair market value
If you are preparing for a start-up loan, most of these records and reports will be pro forma (projected).
Prepare a Business Plan
No self-respecting business loan can expect to be successful without some kind of business plan. You need a business plan, not just because almost every lender wants to see it, but because it helps you plan and a variety of other reasons. No, you don't necessarily need a full 20+ page plan, you do need some written documentation answering the three key questions:
- How much do you want?
- What will you spend it on?
- How will you pay it back?
If you can answer these questions completely and clearly in 4 pages, go for it. Just be sure you have something in hand before you go to that first lender.
Prepare for Questions About Credit, Collateral, Capital
With all this information, you would think you were ready. Not quite. Before you sit down with a lender, be sure you can provide answers to questions about these three important criteria for business loans:
- Credit: Your personal credit and your business credit (if you have been operating your business a while)
- Collateral: Amounts of cash you can use for a down payment, either from your personal funds or from your business
- Capital: Business assets you can pledge to secure a loan.
If you don't have enough collateral or capital to meet lender requirements, consider finding a co-signer who can provide these critical pieces of funding.
Have Everything You Might Be Asked for in a Loan Application
When you start talking with a bank and you get a positive response, at some point you will be asked to complete a loan application. Sure, you have all this information somewhere, but your ability to sit down and complete this application is a huge positive advantage. Using the SBA's Form 4: Application for a Business Loan as a guide, check to see that you know the answers to every question that could be asked.
Include Your Personal Information
Even if your business is a corporation and you have applied for business loans before, your personal financial information is going to be a subject of discussion with your lender and you may be required to provide a personal guarantee. So another key planning step for a small business loan is to get your personal financial records in order, so you can present them along with your loan. You will need:
- A credit report showing your FICO score
- A personal financial statement showing your personal assets and liabilities and the resulting net worth.
- A personal budget, showing how much money you will need to take from your business for living expenses.
Put Everything Together in Your Business Loan Proposal
You may want to put your proposal in a binder or CD, so your lender can see everything at a glance. Finally, don't forget to include an executive summary, which ties everything together.
Identify Financing Sources
As you prepare your personal and business records and that business plan, you should also be searching for banks and other lenders as lending sources. Credit is getting a little easier as the recession recedes, but you may need to make the rounds of lenders, including banks and credit unions. Check with the Small Business Administration (SBA) to see if you qualify for any of their loan guarantee programs.