Whether you’re expanding an existing enterprise or embarking on a new venture, securing a loan for your small business can help you turn your entrepreneurial dreams into profitable realities. But applying for a loan is a complicated process, one you’ll need to be ready for before approaching potential lenders.
Perhaps no one understands today’s complex small business lending landscape better than Sam Hodges, the managing director of Funding Circle USA, an online loan marketplace that connects small businesses looking for funding with non-traditional sources of capital (like individual investors and smaller funds). As the founder of a lending network and a former small business owner himself, Hodges knows the loan application process from both sides of the table.
In a recent interview with Business News Daily, Hodges shared some useful tips that small business owners should keep in mind when applying for a loan.
Don’t get lost in the fray
The first thing you’ll want to keep in mind when applying for a small business loan is that you have a lot of options. From SBA-secured loans to merchant cash advances to alternative lending options, getting a business loan no longer necessarily means paying a visit to your local bank. And while the multitude of loan options might ultimately be a good thing for entrepreneurs, it can also result in a lot of confusion.
“There are a lot of different products on the market,” Hodges said. “It’s really easy for a small business owner to get lost in the fray.”
To avoid getting in over your head with a business loan, Hodges recommends that small business owners ask themselves one simple question: Can they afford it? If taking out a loan will cost you more money that it’ll make you, it’s time to start rethinking your options. Not placing enough emphasis on a good return on investment is a mistake that Hodges says he sees business owners making all the time.
“The money [borrowed] is so expensive to be virtually unthinkable for a small business owner to be able to deploy that money in a way that’s going to have a return higher than their cost,” Hodges said. “Make sure [the money you borrow] is going to push the business forward in a way that’s financially responsible for you.”
Make sure your house is in order
The devil is in the details (in more ways than one) when it comes to business loans. Not only do business owners need to ensure that the people they’re borrowing from are reputable and honest, they also need to make sure their own personal credentials are in order before approaching potential lenders.
There’s a lot of information you’ll have to provide when applying for a loan, including personal tax information, bank statements and, in some cases, résumés, educational background information and criminal records (for a full list, see the SBA’s business loan checklist). But as Hodges points out, application processes for different kinds of loans vary greatly depending on the size of the loan, the terms of the loan and who is doing the lending.
Obtaining a decent-size term loan with affordable interest rates (Funding Circle’s specialty) requires the handing over of some personal data, though not nearly as much as would be required by more traditional lenders, like your local bank. Borrowers should find out early on in the application process what personal information lenders will want to see.
While nontraditional funding sites like Funding Circle tend to focus more on business income and assets rather than personal credit scores, Hodges still advises business owners to maximize their attractiveness to lenders by keeping their own finances organized.
“Make sure your house is in order before you go and apply for a loan,” Hodges said. “Such that, when you go out and talk with lenders, you’re putting your best foot forward.”
Specifically, Hodges recommends paying off any outstanding credit card debts, making sure your credit report is accurateand doing everything in your power to improve your personal credit score.
Have a plan
Once your personal finances are in order, you can start focusing on what’s really important when obtaining a small business loan— your business. If you’re just starting out, then the best way to prove the viability of your enterprise might be with a rock-solid business plan. [For a side-by-side comparison of the best online business plan services, visit our sister site, Top Ten Reviews.]
While not all lenders will require you to submit a formal plan for your business, most traditional lenders (i.e., banks) will. Even if your lender of choice doesn’t ask for an in-depth written or oral description of your business, you should probably have one prepared anyway. Should you ever decide to open your business up to equity investment as an alternate source of funding, you’ll need to have a business plan on hand.
For nontraditional lenders, what’s more important than a formal business plan is a clear indication of where your business— be it brand new or decades old— is headed financially.
“We don’t require our borrowers to submit a business plan,” Hodges said. “We’ll ask a few basic questions about what type of business it is and what you need the money for, but we really look at the financial trajectory of the business and the profile of the borrower. And we’re able to make our lending decision primarily based on those factors.”
So how can a business owner prove that his or her business is headed in the right direction? A good place to start is with some fairly simple financial projection statements. While it might sound like a daunting task, creating a financial projection isn’t as scary as it sounds.