In a perfect world, every entrepreneur would have the resources necessary to transform a very good business idea into a smashing success. However, as you know by now, that is not how it works.
In fact, having a great idea is only part of the equation: At some point, most entrepreneurs need a small business loan. Unfortunately, however, getting approved for a loan can be challenging if you do not have all your proverbial ducks in a row.
When it comes to getting a small business loan, you have to put yourself in the shoes of the bank, financial institution or credit provider that you are interacting with. If you were in their role, would you feel confident loaning money based on the set of circumstances and factors an applicant provided, and the interview process? Once you flip the script and look at things from their perspective, you should be able to see your situation in a less biased light.
That being said, here are a few tips that can help your loan application getting approved.
1. Start the process as soon as possible.
You are not going to walk into your local bank, fill out an application, and get approved for a loan on the spot. The approval process can take days, if not weeks to unfold. That is why it is best to start the process as soon as you can. Do not wait until your business is in dire need of the money or you may end up with your back against the wall.
While you may desire separation between your business and personal finances, lenders will factor in your personal credit history when determining your risk level as a borrower -- there’s simply no way around it.
Firstly, focus on some ways to improve your credit score. Your credit score is made up of the following five factors: payment history (35 %), amount owed/ outstanding debt (30 %), length of credit history (15 %), credit mix (10 percent) and credit inquiries (10 percent).
As you can see, payment history and outstanding debt make up the bulk of your score. By positively improving the conscious management of your credit payments and using less of your approved credit line, you can bump your score up a few points in a matter of months. Realistically, you are going to have trouble getting a small business loan from a traditional lender if you have a score of 660 or lower. Ideally, lenders want to see a score of 720 or higher.
When speaking with a lender, be very clear about how the loan will be used. Giving some vague or general response about growing your business is not going to work. The lender will want to know exactly how the money will be used to determine the feasibility of your application.
Every business is different, but a few of the smartest ways to use a loan include an inventory purchase, business expansion, administrative expenses and capital investments. You may also choose to refinance or pay down debts, but lenders won’t always look at these uses with high regard. Monitor your loans and your credit report – make sure what is being reported about you to potential lenders accurately reflects all payments made.
Organization plays a key role in whether or not you will be approved for a small business loan. If the lender asks for a specific piece of information, you need to be capable of providing it in a timely manner. A lack of organization shows that you are unprepared and risky.
The best thing you can do is over-prepare ahead of time. By having ready every possible piece of information or documentation that your lender could want, you can wow him or her with your efficiency, and take control of the process.
Asking a lender for N10,000,000.00 to grow your business is one thing. But totally different is setting up a meeting and explaining that you have met with your financial advisor, accountant and board of directors, who have determined that you need N13,000,000.00 to expand your production facility and lower your cost of goods sold.
As mentioned, lenders want to see a specific plan. They also want to know that you are not acting alone. They like to see that you are communicating with experts in your field and fully understand the situation.
Getting approved for a small business loan is no easy feat. The burden of proof is on you to convince the lender that you are worth the risk associated with lending money. Put yourself in these people's shoes and think about how you look. Be sure to address your shortcomings and highlight the positives to improve your odds of being approved.