As a small business owner, obtaining your first business loan is a big step. Getting approved for a loan can be challenging if the lender isn’t confident in your ability to pay it back, and there are a few common mistakes many business owners make when applying for their first loan.
Here are four things you should know before you sit down to fill out your first business loan application.
Your Personal Credit Score Matters
One of the biggest mistakes small business owners make when applying for a business loan is neglecting their personal credit score. Since your business credit score probably isn’t well-established, lenders will use your personal score to evaluate your track record of consistently meeting financial obligations. The Small Business Administration’s threshold is 650 for most applicants. Many other lenders might look for a credit score of 720 and higher before approving a small business loan.
You should be regularly monitoring your credit score to keep it healthy, even when you’re not thinking about applying for a loan.
You Must Identify a Clear Purpose for Your Loan
Lenders want to know exactly how you will use the money, which helps them determine the feasibility of your business loan application. Before applying for a loan, have a detailed loan proposal.
Your loan proposal should also include:
- How much money you need
- How your business will use the money
- How you will repay the loan
- What you will do if your business is unable to repay the loan
Some of the smartest ways to use a small business loan include purchasing new equipment or extra inventory when the price is right, hiring skilled help or carrying out a business expansion.
You Should Be Well Prepared to Answer Questions
If you want to be successful in getting a small business loan, you have to be prepared to provide detailed information and documents about your business. Depending on the size of your loan, the lender may also want to review your financial statements and accounting records. Before applying, it’s important to make sure you have all of your information in order. Here are some of the documents you should have prepared:
- Financial statements (including annual revenues, profit and loss statements, and the most current three statements for your business checking account)
- Business and personal income tax returns
- Your business Tax ID and your Social Security Number
- Your business license
Do Your Research on Lenders to Find the Right Fit
Not all lenders and banks are created equal. Before applying for a small business loan, make sure you’re talking to the right lenders who are equipped to serve your unique business, industry and financial needs. A lending marketplace is an excellent place to start because you can access multiple lenders and loan products with just one application.
Here are some of the questions you should be asking potential lenders to find the right fit:
- How many loans have you funded in my industry?
- What’s your average loan amount that gets funded?
- What is the average APR of your current outstanding small business loans?
- What fees are involved with originating and closing on a small business loan?
- What is your required repayment schedule (monthly, weekly, daily)?
- How long does it typically take to receive an offer and to receive funding?
- Do you require a personal guarantee?
- Which credit bureaus do you report to and when?
Getting a small business loan used to be a challenging process, but innovation in online lending has made the path much smoother for business owners to get access to working capital. Getting your personal credit score in check, having a defined purpose for your loan, organizing your financial statements and being prepared to both ask and answer questions before you apply will make the process that much easier.
About the author
A regular contributor to the Lendio blog, Berrak Sarikaya is a natural conversation driver and an Amplifier, motivated by a firm belief in owning who you are instead of trying to fit the mold. As a content strategist and creator, she’s worked with startups, small businesses, Fortune 500 companies, and agencies in both the B2B and B2C landscape.