As an entrepreneur, you’ve worked hard on your business concept or have strategized your next growth move. You realize that your business project requires cash and more than you have available internally. You know that all businesses need capital in some form, either equity or debt, to produce their goods and services. Outside funding is one type of fuel you put into the business engine to propel it forward to open your doors or expand into a new market. But perhaps you’ve heard it is hard or you’ll never qualify for a small business loan. Just the thought of how to prepare, qualify and apply for a loan can be intimidating.
Knowing the steps to get a commercial loan can ease stress and frustration and can improve your chances of getting approved in the time frame you need. Understanding the commercial lending world and what an underwriter is looking for to make a decision will make the process a lot smoother. Here are some things to keep in mind and steps you can start taking now, even if you don’t think you need a loan. (They will also benefit your decision-making and ultimate success!):
1. Know how much your business requires to fund the project, what you will spend it on, and how it will benefit your business goals and profits.
Do you need equipment, materials, working capital, inventory, or a combination of all to produce and deliver your products and services into the hands of your customers? How much will you need for each?
2. Know what you need to have in place to minimally qualify.
The key here is to be able to demonstrate your ability to repay the loan with interest and what you can offer as a backup in case you can’t. Some lenders take on more risk for a price. Know what the business’s and owners’ risk factors are and where you stand before you apply. It is never too early to prepare for funding. The worst time to apply is when you’ve run out of cash. Here are some things you’ll need:
A good personal credit score for every owner over 20% interest.
This varies from lender to lender and product to product, but a good rule of thumb is 680 or higher. Know your score and get your credit report and review it for errors. (annualcreditreport.com) If it is low, start making corrections now. Don’t max out revolving loans, and don’t apply for a bunch of new lines of credit. Do avoid collections and charge-offs. Do pay down existing credit lines, and pay on time, every time!
A personal or business cash investment into the project.
The amount needed also varies with different lenders and products. Generally, lenders will want to see a minimum of 10% of the project amount coming from your pocket, but it depends on your risk factors in other areas. If you aren’t willing to risk your money, lenders don’t tend to want to either, as it may indicate the owners are not confident it is going to be successful.
What can you offer if you can’t pay back the loan?
Cash, equity, equipment? Are you willing to put up a personal guarantee of your personal assets? Not all loans and their lenders require collateral but know what you can offer.
Where is the money to pay the monthly loan payments going to come from? How will sales increase to fund this new expense? This is especially important if you can’t secure the loan with assets. You will need to provide business financials, tax returns, bank statements, and/or future cash flow projections. You will also need to provide a business plan or loan proposal that explains your business and project numbers, sales plan, business feasibility & profitability, demand, and market conditions.
Demonstrated ability to run a business successfully.
If you don’t have a track record or are new, what education, experience, and knowledge are present in the management team? Provide resumes for each manager that applies to your org chart as well as for consultants, advisors, or mentors.
3. Research lenders and their products.
Now that you have determined the above five qualifying criteria, you can now look for a lender that you match with. Do they offer loans for start-ups or businesses in your industry? Can they fund the amount you need for the period you want? Will they consider your credit score? What interest expense can your business afford? What do they require from you?
Lenders that do their due diligence will need a well-written plan about your business and project as well as supporting financials that demonstrate your ability to repay. Lenders that do not, or promise funds in a day or so, are going to make up for the risk they are taking in not vetting you with very high-interest rates.
Start with the bank you have your business bank account with or an alternative lender such as Business Impact NW if you have been denied by a traditional bank or don’t meet their criteria.
4. Prepare your loan package.
The lender will provide you with an application (paper or online) and inform you of the documents needed to submit with the application. Applications may vary but will ask for information about the business and owners, the loan amount, and proposed uses. Be prepared to also submit:
- Business Plan
- Financials (tax returns, statements, projections)
- Personal Financial Statement
- List of available collateral
- Copies of leases, licenses, PO’s, contracts, operating agreements, etc.
- Other documents as required
5. Ask for Help
Small business owners are extremely busy with their daily responsibilities and trying to navigate the commercial lending process can be daunting. This is the time to rely on experts that can save you time and energy getting the answers and support you need.
The Loan Readiness Center at Business Impact NW is designed to help lower the barriers for entrepreneurs and business owners that need commercial funding. We provide free coaching, classes, and other educational opportunities to help you find, qualify and apply for loans. We work closely with the lending department at BINW and other funders.
About the author
Christine is the Loan Readiness Center Director at Business Impact NW. She has been an advisor to small businesses through her work with several Puget Sound SBA Women’s Business Centers, as well as through her private consultancy. She has owned several businesses in varied industries in Spain, California, and Washington. She has brought her hands-on knowledge to thousands of clients; from helping them build a sustainable model to dealing with day-to-day operations through individual advising, webinar presentations, class instruction, and working with partner organizations. Christine has also worked in leadership roles and advised non-profits. As a member of the Covid-19 Response Team, Christine assists clients with government loans and grants, resiliency, and reopening. She enjoys assisting clients with financial literacy, cash flow, and financial statement analysis. She is also a licensed mortgage loan originator and brings this combined knowledge and experience to assist clients with loan readiness. Her combined education in International Relations and Public Administration adds to her understanding when working with a diverse clientele and community organizations. Travel and adventure bring her joy and inspiration and she enjoys being outdoors (preferably the beach), running, and working out at the gym.