If you’re looking to start a small business and you don’t have a trust fund, wealthy friends, a mega-rich godfather or haven’t won the lottery, chances are you’ll more than likely need a small business or bank loan. This means tons of paperwork and personal time. It’s a process that can take months to get a green or red light and even longer to pick up the cash.
So how do you avoid getting rejected, cut the wait time in half and save yourself the misery of drowning in a sea of paper? Here are all the tips you’re going to need.
If it’s a bank loan you’re going after you’ll need careful, meticulous documentation, and to pay attention to detail. Beginning with the loan application form. Whether you’re filling out forms online or walking into a bank to fill them out, you should always remember NOT to hit up as many banks as possible. More is not better.
Rohit Arora, co-founder and CEO of Biz2Credit, an online resource that connects small business owners lenders says, “Applying for loans at multiple institutions can be harmful because each one will do a hard pull of your business credit history. The more hard pulls, the less chances you have of getting money because the banks interpret it as a sign of desperation that you are shopping around. Thus, they will question your creditworthiness.”
Bear in mind that you’ll also have to provide as much personal information as you can. And that includes aliases and, yes if you have one, criminal record.
You should also have a business plan, although this is debatable. If you’re opening up a home-based business you won’t need a 50-page document, but if you’re taking your idea or your business big time, you’ll need to provide a detailed explanation of what your business idea or model is and where you’re planning to take it.
A Personal and Business Credit Report.
Yes, three of those. You’re better off contacting all three major credit rating agencies before submitting a loan application, because your lender is going to pull one anyway. You should do your best to clear up any discrepancies before beginning the loan application process. If your business credit score is 600 or lower, it’ll be harder to secure financing from a bank or credit union.RELATED: Rejected For a Business Bank Loan…Now What?
Arora says you can clean up your business credit by “clearing up past-due debts, opening business credit cards, and paying the monthly balances in full and on time.”
Your Income tax returns and Financial statements. Lenders typically ask for a year of personal and business bank statements as part of a loan package.
Unfortunately, you may have to put down some sort of collateral, especially if there is a high degree of risk associated with your you or your business.
Legal Documents. These include Articles of Incorporation, franchise agreements, business licenses, and any copies of contracts you might have with third parties.
Arora tells the Fox Business Network, “Many big banks turn away requests for startup loans because of their requirements of providing three years worth of financial data.”
Regional banks and credit unions are a better bet. They get you, the understand the local environment better and are looking to help local businesses grow. If you need cash fast, have poor credit scores, or no credit, you could look into cash advance companies, micro-lenders and Community Development Financial Institutions but they can charge as much as 30-40% interest on the loans.
You can also look into a small business administration (SBA) loan. It can be a godsend for business owners who qualify. These were set up by the federal government in the 1950s, to enable lenders to accept greater risk and encourage the growth and development of small businesses. SBA loans also have lower monthly payments than other options and low, single digit interest rates.
It sounds good, but it’s not easy. Not every small business is eligible. Like other bank options it is also paper intensive and time consuming.
However, you can speed up the process and increase your chances in some of the ways listed above. Remember to keep your documents in order and maintain good credit.
The Small Business section of the Huffington Post also stresses that you should, “Be able to clearly present the use of your funds and the specifics of how the money will be used. Lenders have different requirements on use of proceeds — be sure to ask your lender before you get started.”
Banks also want to see that you have the cash flow to make your monthly loan payments. You’ll need a financial plan that proves you’ll be able to make them.