Applying for a loan can be a stressful experience for business owners. It becomes more painful if your application is rejected. After a few cycles of applying and not being approved it's common to give up your hope of having money to expand operations or refinance an existing high-interest loan. Many small business owners make common mistakes on their applications that lead to rejection. These errors are easily correctible, which means that if you don't fix them it's almost like sabotaging your own application.
Find a Lender That Already Lends to Companies like Yours
Small business loans come in many different forms: bank loans with collateral, term loans without collateral, equipment financing, mortgages, loans guaranteed by the Small Business Administration, loans based on cash flow and more. Lenders specialize in different types of loan products. It's important to decide which type of financing you need and then identify lenders make those types of loans to businesses like yours. Some lenders for example may require a minimum level of profitability over several years. Very seldom do lenders approve loans that fall outside of their area of expertise.
Know How Much You Need and Why You Need It
Be specific with your request. Too many applications are rejected due to a lack of specificity with regards to the amount sought and the use of the proceeds. Larger loans will also require a detailed business plan. This is meant to ensure that the borrower has thought through how they will be able to generate the cash flow necessary to service the loan. You can never be too detailed in your business plan. It also provides an opportunity to have the lending officer—who has seen many applications and the subsequent results—provide insight into your assumptions. Perhaps you aren't being realistic and it's better to discover this before you borrow money that you may not be able to pay back.
Triple Check the Documentation Requirements and then Check Them Again
Each lender has documentation requirements and these vary depending on the type of loan. Generally most lenders will require at least some of the following items:
- Personal information worksheet (name, address, work history, social security number)
- Personal credit report with FICO score
- Personal income tax returns
- Business formation documents (articles of incorporation, by-laws, and more)
- Business income tax returns if the business reports separately
- Business credit report
- Bank account statements
- Existing loan agreements
- Business plan
- Financial statements (income statement, balance sheet, and cash flow statement)
- Profile of any assets to be used as collateral
Sending an incomplete documentation package will delay the process at best and at worst may hurt your odds of being approved. Even if your lender doesn't require this information it would be wise to have it organized and available.
Apply for a Loan Before You Actually Need the Money
Lenders aren't entrepreneurs. They don't see a potential borrower as an opportunity; they see them as a risk. Their goal is to determine if the level of risk posed by a particular borrower falls within their parameters. A lender that makes a net profit margin of 2 percent on a loan must successfully lend $5 million to recoup the loss of a single $100,000 loan that isn't paid back. This means that the best time to apply for a loan is when your business is doing very well and generating large amounts of cash flow. Your chances of being approved are higher and you can negotiate attractive terms. But if your company is facing a cash crunch or is at risk and needs a loan to survive, most lenders won't feel comfortable taking that risk.
Remember That You Are Just as Important as the Application
A perfect application doesn't guarantee that your loan will be approved and funded. There is an intangible factor that is important—the lender's impression of you. Lending money, even with collateral, is a risky business. Lenders are betting on the business owner's character, work ethic, expertise and commitment to ensure that the funds are used as intended and the loan is paid back on schedule. When you speak with the lender either in person or over the phone treat it like a job interview; make the best impression you can.