Running a small business isn’t cheap. First you have to come up with the money for start-up and initial operating costs. After you’ve been in business for a while, you may want to expand. That costs money, too.
But it’s not easy to get a small business loan, especially in the post-recession world, where lenders are examining borrowers’ credit histories more closely than ever. Like many small business owners, you may be considering funding your expansion, or other small business needs, with merchant cash advances or business credit cards. But these lines of credit can come with costly interest rates that can put a crippling repayment burden on your business.
Bank loans are the way to go, and there’s a lot you can do to make your small business more likely to qualify for a bank loan. Pay down debt, keep solid financial records, pay your taxes by the book, and keep an eye on your business credit score. Your business will be more likely to qualify for a loan if you’ve been operating profitably for a while. When you speak to the loan manager, emphasize your experience, and try to sell yourself as a savvy business owner who will make great use of the bank’s money.
The first step toward qualifying for a small business bank loan is finding out what your business’s credit score is. Although there are plenty of circumstances under which your personal credit score can influence your small business credit score, your small business credit score is different from your personal credit score. It shows your history of business transactions, any debts your business may be carrying, and any payments your business may have defaulted on.
Ideally, your business credit score will be good. You’ll have kept your personal and business credit and bank accounts completely separated. Your business won’t be carrying a lot of high interest debt, and there won’t be any unpaid bills or items in collection.
If you have any outstanding bills, pay them. If you’re carrying a lot of high-interest debt on business credit cards or merchant cash advance lines of credit, you’ll need to work on paying those debts down to improve your chances of qualifying for a small business loan. A bank will consider your business’s financial obligations to other lenders — the amount of money you already owe — when deciding whether or not your business seems likely to default.
Your business’s books hold most of the fiscal information banks are looking for when they decide whether or not to lend to your small business. The better your books look, the better your chances of qualifying for a small business loan.
Your financial records should communicate your business’s financial history and projections, and should be easy to understand and generally well-kept. This will help banks get a real grasp of your character as a small business owner, your business’s assets and debts, the collateral you have to offer, and your business’s overall track record. You’re best off hiring an accountant to handle this aspect of your business administration for you.
Don’t be tempted to underreport revenues and over-report losses in order to slash your business’s tax bill at the end of the year. Not only will you get caught and have to pay IRS fines or face other legal repercussions, it will also make it harder for you to get a small business loan. Tax liens and fines count against your business’s credit worthiness.
Accurate reporting, on the other hand, shows banks that you’re honest and law-abiding, and also gives both you and any potential lenders a much better picture of your business’s financial condition. If your tax responsibilities are overwhelming, it’s cheaper than you might think to outsource payroll services.
This might go without saying, but the longer you’ve been in business, the more likely you are to qualify for a small business loan. Most small businesses fail within the first five years, so if your business has been operating for two or more years, you’re more likely to qualify for a loan — especially if you’ve been turning a profit or at least breaking even. The longer your doors have been open, the more history your bank has to draw on to decide whether or not your business will likely survive long enough to repay the loan.
Not to mention, a longer business history shows you have experience in your industry. Banks aren’t going to want to loan you money so you can learn your business; they want you to already know what you’re doing when you get the money. When you apply for a small business loan, it’s important to present yourself as an experienced professional and be able to tell the bank exactly what you’re going to do with the money and, perhaps more importantly, how it will influence your business’s financial future.
Running a business isn’t cheap, and getting a small business loan isn’t easy. But it’s not impossible, either. Look after your business’s financial health and credit score, and you’ll find that most banks will be happy to loan your business money when you need it.Back to blog list