Starting a business is exciting. You get to be your own boss and pursue a dream. Beware, however, that the life of an entrepreneur isn’t an easy one. You’re going to need a lot of help along the way.
Many small businesses apply for loans. It takes a lot of money to start a company, and most entrepreneurs don’t have that kind of capital sitting around. Once they get the business off the ground, they pay back the loan and focus on turning a profit.
You can’t just walk into a bank and expect to be approved for a loan, especially when lending conditions are tight. In fact, about 80% of small business owners who apply for a bank loan get rejected.
What separates the entrepreneurs who successfully get a loan from the rest? Here’s how they do it:
Determine Whether a Loan Is Needed
Before you ever set foot in a bank, you need to learn whether your small business actually needs a loan. Getting into unnecessary debt can be like digging yourself into a hole you can’t climb out of. Look at all of your options before making a final decision.
First, take a look at your company’s budget. You might be able to make some cuts or rearrange funds to cover your costs. Selling a company car might hurt, but it beats paying thousands of dollars in interest.
Make a Plan
Once you’ve decided a loan is your best option, you need to make a plan. How are you going to use the money? How will you pay it back, and over what time frame?
Lenders want to hear thought-out answers to those questions. “We look at how it will improve the company in the long run, as it will just add a liability in the short run,” explains Stan Bril, founder and CEO of commercial lending firm MCG. “We also look at the founder’s exit strategy, if they have one, because that’s when we’ll get our loan back.”
Your plan will not only sway the bank in your favor, but also set you up for success once the loan is approved. Loan money is to be used wisely and with a purpose. Waste the money you’re lent, and you’ll struggle to get loans later on. Worse, your business’s reputation and brand will be damaged because of it.
Know What Banks Look For
When approving loans, banks look at many different factors. Knowing what they focus on will give you an advantage when making your pitch.
First, a bank will look at your company’s financials. “Banks want to know whether a business is currently growing,” says Alan Crystal, vice president of finance at SmartBiz Loans. “They assess the business revenue trend by calculating the average revenue growth over time. To limit the risk of default, banks look for revenue growth trends that match (or exceed) the industry average.”
Second, if for some reason you’re unable to pay the loan in full, the bank will look to see if you have any assets that it can use to regain lost capital. It’ll also take into account your company’s credit history and overall expenses, so be prepared.
Lenders want to invest in companies that show promise. If your company is struggling to make ends meet, it will be hard to get approved. You need to show lenders that you have what it takes to succeed, and that you recognize the consequences of failure.
Understand the Process
Understanding the loan process also gives you a greater chance at success. The more involved you are with the bank, the easier it is for them to work with you. Be prepared with all necessary documents, numbers and collateral you might need.
What’s the biggest mistake companies make when they reach out for a loan? “Most companies that come to us asking for a loan have no clue how intricate the approval process is,” Bril points out. “There is a lot of required documentation, and all the numbers have to match up. Collateral is important in case of default.”
When in doubt, over-prepare. The last thing you want is to be turned away because you were missing paperwork. Bring anything that might be helpful—it might just come in handy.
What happens once you’ve been approved for a small business loan? Use it thoughtfully, and pay it off quickly. Be sure to stay in touch with your bank: If things don’t go as planned, your lender is less likely to be understanding if they feel blindsided by bad news.
For entrepreneurs, planning and execution are critical. Small business loans are no exception.
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Serenity Gibbons is a former assistant editor at The Wall Street Journal. The local unit lead for the NAACP in Northern California and a consultant helping to build diverse workforces, Serenity enjoys gathering insights from people who are creating better workplaces and making a difference in the business world.
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