It takes money to make money – you know this better than anyone. But what if you don’t have enough capital to keep your small business moving forward? Well, you can just go out and get a loan, right? Kind of – but there’s actually a lot that goes into getting approved for a small business loan and you need to know what lenders are looking for.
Five Specific Factors Lenders Carefully Consider
Every lender and lending institution has their own set of rules and requirements they reference when it comes to analyzing a small business loan candidate. And while there are outliers, most look at the same set of factors. These frequently include the following:
- Personal Credit Report
Hopefully, you’re doing a good job of separating your personal and business finances. Establishing separate accounts is very important – both for taxes and for peace of mind. It also helps prevent business issues from impacting your personal credit score and vice versa. But it’s not always that cut and dry.
“Even after you’ve established separate financial accounts for your business, your personal credit score still matters to lenders of small business loans,”
- Organization and Preparation
“Being disheveled is never sexy — not when looking for a date, and certainly not when applying for a loan,” business journalist Elizabeth Palermo says. “When it comes to approaching potential lenders, business owners should have their act together. That means having all the paperwork you’ll need for your loan application on hand.”
We’ll discuss some of the specific business documents you’ll need to show lenders in the following sections, but for right now it’s important to stress the significance of being organized.
While lenders are very analytical in nature, basing most of their decisions on the numbers they see in front of them, there’s also a subjective aspect to the whole process. If they feel like you don’t have your act together, they may not feel comfortable working with you. There’s value in being organized, prepared, and poised.
- Detailed Business Plan
“A careless attitude may help you attract certain types of people, but it certainly won’t help you woo lenders,” Palermo mentions. “Having a plan and sticking to it is much more attractive than spontaneity in the finance world.” Specifically, you need a detailed business plan.
A business plan is largely viewed as a prerequisite for business success. Thus, almost every traditional lender you run across will demand one from you. If you can’t oblige, they’ll simply refuse to work with you.
While a business plan – if you don’t currently have one – may seem like a nuisance, the truth is that having a concrete plan will position you better for the future (regardless of whether or not you get a loan).
- P&L Statement
Another super important piece of paper most lenders will want to see is a P&L statement. Once again, this is something you need to have regardless of whether you’re meeting with lenders. But what are lenders looking for in your statement?
The first thing they want to see is reliability. They want to make sure you’re able to make the payments you already owe, while still having enough cash flow to satisfy their loan. If this isn’t the case, then they’ll see you as too high of a risk. Lenders can also tell when you’ve actually taken the time to develop and maintain P&L statements over time, as opposed to when you haphazardly threw one together for the purpose of meeting with them. Keep this in mind.
Finally, lenders will vet your numbers to make sure you aren’t manipulating them for the sake of looking better. Get caught doing this and you’ll be pushed out of the door before you can even apologize.
- Personal Resume
Finally, your personal resume will factor into things. If you’re a first-time business owner with very little experience, then a lender is going to stick very closely to the numbers and make decisions based on the facts in front of them. However, if you’re an experienced entrepreneur with a track record of building successful businesses, then the lender may not place as much emphasis on the numbers. Your personal resume matters – so make sure you’re keeping it up. (And feel free to flaunt it when appropriate.)
Ensure You’re Well Rounded
Qualifying for a small business loan doesn’t hinge on a single factor. If you want the opportunity to obtain loans on good terms, you need to ensure your business is well rounded and balanced. And since you’re an extension of your business, this means taking care of your own financial situation, too.
It takes a long time to establish a healthy financial picture, but you’re only one dumb decision away from wrecking your chance of obtaining a loan. Remember this and don’t let your guard down.
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Written by Larry Alton.