Now that you’ve gotten through the startup phase, here’s what to know about seeking loans to boost your growth.
Congratulations! You’ve started the climb to greater entrepreneurial heights. For most ventures at this stage, more cash is key to growth. And while other lending sources have emerged, including crowdfunding sites like Kickstarter, banks remain entrepreneurs’ overwhelming favorite. Here’s what the Federal Reserve is reporting in its most recent Small Business Credit Survey:
- Banks either fully or partially approved 82% of small-business loan applications in 2018, according to the Fed’s survey1
- 80% of small-business owners want their businesses to become much or somewhat larger2
- Of the 43% of small businesses who applied for financing, more than half of those applicants (56%) are funding new opportunities or assets to grow their firms3
Ready, Set, Apply
Joining the ranks of successful borrowers takes some time, planning and preparation. Here’s how to set yourself up for the best possible application experience.
1. Build a long-term banking relationship.
Consolidate your business accounts—including checking, savings and credit cards—at one bank, and consider giving it your personal business, too. When you keep a strong relationship with a single lender, its business team can become more intimately acquainted with your venture and its mission.
2. Explore your loan options.
For seasonal businesses with predictable lulls in income, a revolving line of credit can bridge those gaps. But if you’re running a bakery, for example, and need to make a one-time equipment purchase, a fixed-rate term loan may be the answer. Talk with your accountant about the tax implications of each.
In 2018, 22% of small-business borrowers also benefited from Small Business Administration loans, in cooperation with their banks.4 With an SBA loan, the organization acts as a co-signer. In exchange for its support, the SBA maintains stringent criteria, including a solid business plan, sufficient owner equity, and proven management expertise, among other requirements.2
Read related articles:
3. Review your financial records.
A critical factor in being granted your business a loan is your firm’s current and future financial health, recorded by your business tax returns and other documents. Are you showing a stable income stream and gross margin—especially as compared to your competitors? Does your business show sufficient growth potential?
Your financial records, along with the last two years of business tax returns, will answer these questions for the underwriter.
4. Revisit your business plan.
You had to create a plan to launch. Now use that plan to show how well you’ve executed your original vision. Then create a strategy document for the road ahead. How do you want to grow, and how much credit do you need to realize that goal? Where do you see your company in three to five years? Answering these questions can boost your approval prospects.
Read related article: Building Blocks of an Ongoing Business Strategy >
5. Give yourself a personal credit checkup.
It’s a common misconception that a business owner’s personal credit is separate from the firm. In 86% of loans granted, the bank considered the owner’s credit score solely or in conjunction with the business’s creditworthiness.5 So, it makes sense to review and repair your personal credit history before filing an application.
6. Think about collateral.
In 58% of the small-business loans granted last year, a lender asked the owner to accept personal
responsibility for the loan—even if the business ceases operation.6 This is a form of collateral; other types include business and personal assets, such as real estate, or even a portion of future sales.
Talk with your relationship manager to find out more about how your bank goes about granting small-business loans. Once you’ve made the preparations for your application, you’ll be better set up for success.
1Small Business Credit Survey, Federal Reserve Banks, 2019
https://www.fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/2019/sbcs-employer-firms-report.pdf, Page 18
2Ibid, Page 5
3Ibid, Page 10
Page 13: Reasons for rejection
Page 15: Types of funding requested (loans or lines of credit)
Page 15: SBA 22%
4 Ibid, Page 15
5Ibid, Page 9
6Ibid, Page 9
Source: United States Federal Reserve System
Federal Reserve Banks
Small Business Credit Survey
2019 Report on Employer Firms
Source: U.S. Small Business Administration
Lender Match helps you find lenders
This article is for informational purposes only. It is not designed or intended to provide financial, tax, legal, investment, accounting, or other professional advice since such advice always requires consideration of individual circumstances. Please consult with the professionals of your choice to discuss your situation.