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Delancey Street is a premier small business lender, based out of NYC, that has helped broker 100's of millions in business loans. They are a pro, at making sure you get all of your financing needs satisfied.
- Over $200 million in funding secured
- Can handle low risk credit
- Handles all industries
- Handles high risk and low risk loans
Applying for a Small Business Loan: Everything You Need to Know
Starting and operating a small business is not an easy feat. The importance of your first small business loan can’t be downplayed as it is considered a significant milestone that could mark the beginning of a new venture, or even propel an existing small business to revamp or scale-up. Applying for a small business loan may seem daunting at first. However, if you take the time to study and understand the different financing options available, the process can be a smooth sail. Here’s everything you need to know about applying for a small business loan.
Pre-Application Phase
Before submitting a small business loan application, it’s essential to familiarize yourself with all the financing options available. Financing can come in various forms such as business credit cards, loans, angel investments, and other means. Understanding the pros and cons of each option is crucial because it will help you determine which route is most sensible for your situation.
Your Credit Score
Credit plays a significant role when it comes to small business loan decisions. It’s vital to demonstrate your ability to pay back borrowed funds, considering that you’re asking lenders whom you don’t have any previous relationship for potentially thousands of dollars. Your repayment history speaks volumes of your financial trustworthiness, and it translates to your credit score.
Both your personal and business credit scores highly impact your lender’s decision, and they also determine the loan terms’ suitability. Even though credit isn’t the solitary factor taken into consideration, it’s the biggest piece of the puzzle. Thus understanding your scores and how to improve them is an undeniable asset towards a successful small business loan application.
Business Credit Scores
As a business owner, failing to separate personal from business accounts is problematic since it creates confusion during tax time or requesting a loan. It’s advisable to set up a proper business account early enough to establish and build a reliable credit history. Creating a clear distinction between business finances and personal expenses also ensures that personal financial problems don’t affect your business credit score.
Personal Credit Scores
Even with different accounts for business and personal expenses, lenders still consider personal credit scores. Similar to hiring a professional driver with a terrible driving history that affects your trucking business, your personal credit score plays an important factor in your budding lender relationship.
Repayment history carries more weight towards your personal credit score. Timely bill payments are the best way to keep your score healthy. Personal credit scores range between 300 to 850. A score of 700 is considered “good,” and above that, it’s exceptional. Common causes for low credit scores include:
• Holders with high outstanding balances
• High utilization rate- how much you use of your revolving credit limit
Tip: ensure your utilization rate is below 10%. You can achieve this by dividing your current balance by your credit limit, then multiplying by 100.
Ways to Improve Your Credit Score
Improving your credit score calls for understanding what it means and looking at your credit report. Anyone can access their credit report for free from popular reporting sites such as Credit Karma. The following are some aspects to focus on when looking at your report:
• Errors in report- inaccurate information
• Past-due debt- unpaid loans
• Tax liens: state or federal unpaid taxes
Other credit tips include- keeping your balance low, not closing an account when paid off, diversifying your credit if feasible, and using a credit monitoring provider to watch for fraudulent or negative activity.
Making Your Argument
Priming yourself by creating a specific loan request helps lenders make an informed decision about your business loan eligibility. Identify how much you need and explain why your business investment requires it. For instance, creating a budget showing what you intend to allocate the funds towards like purchasing equipment, indicating its market price and how it’ll yield income for your business.
Financial Statements
Your financial statements’ examination over several years is crucial when it comes to credit application. Consulting your accountant to prepare the following documents supplements a successful loan application:
• Income Statement depicting profit/loss
• Balance Sheet
• Cash Flow
Reviewing your statements will help you answer essential business trending questions, such as- where and how I’m making my money, my primary costs and whether my business generates profits. If not profitable, creating a profitability plan is fundamental, primarily because without one, utilization of small business loans becomes impractical.
Documentation
Upon completion of your application submission, lenders request some documentation. The following are critical supportive documents that most lenders require:
• Financial Records: two or more years of balance sheets and income statements.
• Tax returns: one to two years of business tax returns.
• Accounts Payable/Receivable: full breakdowns of incoming and outgoing payments.
The Offer
After submitting your application, you’ll receive a loan offer. Lenders base the amount they offer on the information you provided during the application, generating APR and interest rates from your scores. Understanding the difference between interest rate and average annual percentage rate (APR) is significant. The lender charges an interest rate as a percentage of the loan amount, while APR represents the total annual interest, including service fees charged. Comparing the two numbers and understanding the exact terms of your small business loan is essential before signing the agreement.
Table 1: Small Business Loan Application Checklist
Phase
Action
Pre-Application
Study Different Financing Options
Explore available financing options and gain insights into the pros and cons associated with every option.
Familiarize Yourself with Credit Score
Understand your personal and business credit scores and what they imply.
Understanding Your Credit Score
Personal Credit Scores Matter
Realize the importance of personal credit scores since they affect a lender’s decision-making process.
Business Credit Scores
Establish a proper business account while separating your finances to prevent personal financial issues from affecting business credit scores.
Improving Credit Scores
Access your credit report, examine it for errors or past due debts. Keep account balances low, diversify credit if feasible, and use credit monitoring providers to flag negative or fraudulent activities.
Making Your Argument
Create A Specific Loan Request
Create a detailed budget showcasing how to allocate the funds and how they’ll yield income for your business.
Financial Statements
Examine prior financial statements with aid from an accountant. Cite income statement, cash flow, and balance sheet with critical focus on the main profits and costs.
Profitability Plan
If your business isn’t profitable, generate a plan towards profitability before requesting small business loans
Documentation
Prepare Supporting Documents
Acquire relevant documentation, including tax returns, two years or more of balance sheets and income statements, and a breakdown of outgoing and incoming payments.
The Offer
Interest Rates
Consult your lender on interest rates versus APR, ensuring that you understand the terms of your small business loan.
Table 2: Common Reasons for Low Credit Score
Reasons Solutions
Low credit utilization rate Try keeping your utilization below 10%
Holding high balances Pay above minimum payment
Late bill repayment Pay bills punctually
Unpaid debts Address unpaid debts
Errors on credit report Request error correction from the credit bureau
Tax liens Pay taxes as soon as possible
Table 3: Required Supporting Documentation
Documents Description
Financial records Income statements, Balance sheets dating back two years or more
Tax returns One to two years of business tax returns
Accounts payable/ Comprehensive records of incoming and outgoing payments
receivable
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