Improve your success rate when seeking a small business loan
How to get access to the finance you need to grow your small business.
Every business needs an injection of finance from time to time and for small businesses this is especially important as they seek to grow from a startup or one-man-band operation into something larger and more significant. However, hard cash is also the toughest thing to attract and maintain when you’re a growing company with limited resources and a short history of trading. That’s why small business loans play such a key role in developing the SME community. They can literally finance the progress from ‘small’ to ‘medium’ and onward from that. Without investment it is extremely difficult and slow to achieve a company’s goals.
So how do you improve your success rate when seeking a small business loan to help you do just that?
Free up more cashflow to make the business look healthier
It may sound bizarre to say that you need more cash in the business before a lender will give you more cash. However, the reality is that few lenders will be willing to provide a small business loan where there is very limited cashflow. The simple reason is that the smaller the cashflow, the more probable it is that there will be issues repaying the loan if it were to be granted.
Make sure your personal credit record is good or better
If your venture is very new then you can improve your success rate when seeking a small business loan by ensuring you have a good personal credit record. As the owner you may need to stand as a guarantor for your business and take out a guarantor loanor you may need to take a personal loan in your own name to finance growth in your business. Neither of these are transactions to be undertaken lightly; you should always check that you understand the risks and implications of guarantor loans or personal loans to use for the business because your own personal finances could be put at risk. But if you do decide on this route to raise business funding and finance (perhaps because you have no other choice) then either way, a great personal credit score will give you a much better chance of being approved for the amount you want and, just as importantly, at a favourable interest rate.
Be organised and on top of the necessary paperwork
Loan applications can be long and complex and they may require a whole heap of supporting documentation. The application process is generally more complicated than, say, a personal loan or even a mortgage, because the debt may be unsecured (if the company has few assets) or may be secured in a highly variable valuation of assets – this means lenders are taking a much greater risk when they lend to a fledgling business so they will, naturally, seek to minimise that risk. If you haven’t got your head around the figures and you’re not able to get your hands on tax or company documents, for example, then your chances of getting a small business loan approved will go down drastically. Don’t even think about making your application until you are absolutely clear about everything that is required and have all relevant documents within easy reach; and understand how they might impact the outcome of your loan application.
Show how you plan to use the money and grow the business
Do you have a formal business plan for the future of your business and are you working through that plan towards your ultimate goal? Any lending institution or investor is going to want a detailed explanation of why you want to borrow the money, why you need as much as you are asking for and why exactly it’s needed. It may be necessary to show why you couldn’t do what you need to do without a small business loan, or to demonstrate exactly how the money will help your business to grow.
Try to think about exactly where it will be spent so that you can explain this to the lender rather than rely on vague statements about where the money would be assigned. Make sure you have a full business plan in place and that you are able to concisely articulate what the money is for and why it will benefit the business.
If necessary get help with the business plan from a professional. Your accountant may be able to help with this or can recommend someone else who can.
There is a lot of competition for small business loans so it’s necessary to be able to show why you should be approved, rather than another company that might be applying for a similar amount around the same time. Banks and other lenders will often have a limit on how much they can lend in any given period so will naturally have to make a comparison between your business and other businesses also applying for financing. Make sure yours is the business that stands out as the best proposition.
Be proactive in answering this question in the mind of the person making the approval decision. Collect evidence and statistics, go armed with documents and data and get professional advice where appropriate. Ensure your documents, data and statistics are all professionally presented – it will instil confidence in the lender that you are serious about your business. It is crucial to be able to show that you’re not just looking for ‘free’ money and expecting it to fall into your lap. Remember lenders may be working within certain constraints but they are human too so by being proactive and enthusiastic from the very first contact you can get them on your side.