Financing a small business loan has been hard in recent years. Even now, well into economic recovery, it's probably more difficult than it was back in the mid-2000s, although there's no doubt it's getting easier all the time. How easy you're going to find it depends on a number of factors:
- Your business's age and its record of success
- Its credit score, if any
- Your personal credit score, at least unless your business is so well-established that its creditworthiness isn't affected by yours
- The type of loan you want
- How much you want to borrow
- Your reasons for wanting to borrow, and the strength of your business plan insofar as it affects your ability to repay the loan
How many of those are likely to bother a lender -- and by how much -- is likely to depend on the type of borrowing you require and the amount you need. Let's address them one by one.
Your Business's Age and Its Record of Success
There's not much you can do to change your business's history. But you should be aware that younger ventures (especially start-ups) and older companies that have been through a recent rough patch often need to work harder to borrow.
Make up for perceived weaknesses by presenting a strong and compelling business plan, and be ready to back your judgment by accepting personal liability for the debt.
Your Business's Credit Score
You may not be aware that your venture has its own credit profile, but it's likely that it does -- and that lenders may want to view it before approving your application. Just as you would with your own credit report before applying for a personal mortgage, pull your company's files from the main bureaus before engaging in the loan process.
Doing so may reveal errors you can challenge, and can also allow you to prepare in advance explanations for any negative information. If you pull your file early enough, you may find strategies that let you boost the score before completing your application.
By the way, if you plan to engage with other companies in relationships that are important to your business, it's a good idea to pull their credit profiles before you sign deals. You need to know with whom you're partnering.
Your Personal Credit Score
If you're likely to have to guarantee the small business loan personally, the lender is likely to be as interested in your personal credit score as any other factor. So, just as with the business's reports, pay close attention to it in advance of making the application.
Type of Loan You Want
There are a number of types of loan available, including:
- Long-term loans -- generally used for major spending ("equipment loans" are a subset of these), the acquisition of another business, refinancing, meeting working capital needs and so on.
- Short-term loans -- mainly used for buying inventory, funding an isolated project or smoothing a temporary cash flow issue. These usually don't require installment payments, and the principal and all the interest become due on the agreed end date.
- Lines of credit -- a product that allows a business to borrow only when required. Business credit cards are a subset of these, but banks and others provide plastic-less alternatives, often with higher credit limits.
- Commercial loans -- borrowing that's secured against real estate owned by the business. Like a home equity loan for consumers, these are easier to get approved for, but can be expensive and time-consuming to set up.
- SBA loans (SBA 7(a) loans) -- backed by the Small Business Administration (SBA), these may have longer terms and lower down payments than many others, but only ventures that meet strict eligibility criteria are likely to be approved.
- Leasebacks -- a valuable asset owned by a company is sold to a third party and then immediately leased from it. This creates both a cash injection and a continuing financial commitment.
The range of potential lenders is similarly long. As well as banks and other traditional financiers, check out credit unions (which The Wall Street Journal recently cited as a rapidly growing source of small business loans), family and friends, credit card issuers, crowd funding, state and federal business loan (and grant!) programs, peer-to-peer lenders and venture capitalists. An easy place to get started is the LendingTree website.
How Much You Want to Borrow
There isn't a straight-line correlation between the amount you want to borrow and the ease with which you're likely to get approved. But it's a very close relationship.
Think carefully when deciding how much to ask for. The more you request, the higher the hurdles you're going to have to jump. But lenders aren't impressed if you apply for less than your plans suggest you're going to need. Be... well, businesslike.
Your Reasons for Wanting to Borrow
If you have a thriving venture and compelling expansion plans that clearly demonstrate a healthy return on your investment, you probably stand a good chance of seeing your application succeed. But if your business has been struggling, and your borrowing looks as if it's just a crutch to help you hobble on until you're hit by the next crisis, you may well be declined.
Most businesspeople are somewhere between those two extremes. Put yourself in the shoes of the loan underwriter, whose main motivation is to avoid causing the employer to suffer a loss. Anticipate the questions and red flags that are going pop up in her mind as she reads your application, and be ready to address those with facts, figures, costed plans and realistic cash flow and profitability forecasts. When financing a small business loan, preparation and presentation are much more important than luck.
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