Getting a loan to start or grow a small business is rarely easy, especially since the financial crash of 2008 and the credit crunch that followed. Finding the right lender and navigating the application and underwriting process is challenging. So being adequately prepared and taking practical steps to improve your chances ahead of time can help reduce the amount of time you’ll spend and reduce your frustration with the process. With that in mind, here are four tips for getting approved for a small business loan.
Know your business credit score AND personal credit score
Gerri Detweiler, Education Director for Nav, a platform that connects small business owners to financing, says that the first thing any small business owner should do before applying for a small business loan is check their business and personal credit score. “Some lenders may review one or the other, and some review both,” Detweiler says.
How to find your business credit score:
Your business credit score is based on trade credit (when a supplier allows you to buy now and pay later) and other debt in the business name, such as credit cards and equipment loans. Business credit is measured on a scale of 0-100, with a score of 75 or more being the ideal range. Both Experian and Dun & Bradstreet calculate business credit scores.
If your business is very new or hasn’t used credit in the past, you may not have a business credit score. In that case, Detweiler says, your personal credit score will probably play a larger role in getting the loan approved. Most lenders look for a personal credit score of 640-660 or higher.
How to find your personal credit score:
There are numerous free credit scores available for you to access; however, not all scores are considered equal. Credit lenders will often pull specific scores, depending on the product you are applying for. Therefore, we have created a simple chart for you to see where you can get specific credit scores from the top two companies — FICO® and VantageScore.
You can order a copy of your personal credit report from each of the three credit reporting agencies once every 12 months, free of charge, by going to AnnualCreditReport.com. Once you have the reports, make sure you recognize all of the information on your credit reports, such as names, addresses, Social Security numbers, credit card accounts and loans. Make sure there aren’t any accounts belonging to another person with the same or a similar name as yours, fraudulent accounts resulting from identity theft, or the same debt listed more than once. If there are any errors, contact the credit reporting agency (Experian, Equifax, or TransUnion) that sent you the report and follow their instructions to dispute the error.
The best option: FICO® Score 8
Find the right type of lender for a small business loan
Traditional banks may be the first option that comes to mind when you think about a small business loan, but Detweiler says most banks don’t make startup loans. Even existing businesses may have a hard time getting a bank loan of less than $50,000, depending on the lender.
Your first step should be talking to the bank or credit union that holds your business checking and savings accounts. They may be able to offer a term loan or line of credit. They may also be able to help you with a loan backed by the U.S. Small Business Administration (SBA). The SBA’s 7(a) Loan Program is designed to help small and startup businesses with financing for a variety of purposes.
Nonprofit small business loans
If a traditional or SBA loan is not an option, you might consider a nonprofit microlender. These loans are a bit easier for startups to qualify for. Their standards are less stringent because profit is not the lender’s objective. They often focus on helping disadvantaged communities or minority business owners. According to the Aspen Institute’s FIELD program, the top U.S. microlenders are:
- Grameen America – helps women in poor communities build businesses
- LiftFund – offers microloans in Texas, Louisiana, Mississippi, Alabama, Arkansas, Missouri, Kentucky, and Tennessee
- Opportunity Fund – provides loans to low-income residents of California
- Accion – offers loans from $5,000 to $50,000 throughout the U.S.
- Justine Petersen – provides loans under $10,000 to entrepreneurs who don’t have access to commercial or conventional loans
Get your financial statements in order
Whether you apply for a loan through a bank, credit union, or non-bank lender and whether you rely on your business or personal credit, anyone who lends money is going to want financial statements.
Getting your financial statements in shape before applying for a loan will increase your chances of approval and help you qualify for more competitive rates. For your business, these are the key documents a lender will want to look at:
- Profit and Loss (P&L) Statements
- Balance Sheets
- Statement of Cash Flows for the past three years
Providing financial statements can be a significant hurdle for small business owners and startups who’ve neglected their bookkeeping. If you’ve been cobbling together the books on your own, you probably haven’t been preparing your business financials in a recognized basis of accounting such as Generally Accepted Accounting Principles (GAAP). You may need to hire an accountant to get your business books in order and prepare the financials. This can be costly, so find out what your lender requires before you get started.
The lender may also want to look at a personal financial statement:
- Your assets
- Liabilities (debts) and contingent liabilities (such as a co-signed loan or outstanding lawsuits)
You can download a Personal Financial Statement form from the SBA website for an indication of the information you’ll be required to submit, but banks often require their own form.
Run your own background check on Google
Gil Rosenthal, director of risk operations at BlueVine, a provider of small business financing, says lenders will often Google loan applicants and check social media profiles to see what others are saying about the business and its owners.
Loan underwriters are looking to see whether you are considered a trusted authority online, whether you’re using social media to promote your brand, and whether you quickly and effectively respond to customers. Be cognizant of your online reputation, including Yelp reviews, and keep your business and personal social media profiles up to date.
If your online reviews are less than glowing, Rosenthal says, “you can mitigate the impact by being prepared to explain anything negative that comes up in the application process.”
The bottom line
Even if you have all of your proverbial ducks in a row, finding the right terms from the right lender may take some time. By anticipating what your lender will review and require, you’ll greatly increase your chances of getting approved for a small business loan.