How to Prepare for Your Loan Application
As with many things in life, preparation is key for a successful loan application—particularly if you are starting a business. We outline some of the steps you’ll need to take to get ready to apply:
- Prepare a detailed business plan.
- Demonstrate your relevant industry and management experience.
- Get your personal finances and credit in order.
- Be prepared to offer collateral, a personal guarantee or a cash down payment.
- Detail what the loan will be used for.
- Register your business and get the appropriate licensing.
- Choose a bank you have a relationship with.
Prepare a Detailed Business Plan
Your business plan will be make-or-break to your loan application. Any good business plan will include the following elements:
- An executive summary
- A company overview
- Description of products and services
- Market and competitor analysis
- Marketing and sales strategy
- Overview of the management team
- Detailed financial forecasts
A good business plan should make it easy for your lender to approve your application and give you funds. To get your business plan up to par, we recommend new entrepreneurs consult local chapters of business associations, such as SCORE or SBA regional offices, to get help with writing and refining their plan. We also advise business owners consult a CPA for help in preparing or reviewing the financial forecasts.
Show Your Relevant Industry Experience
In your business plan, you’ll want to give a detailed explanation of your and your business partner’s relevant industry and management experience. You need to make the case to your lender that you and your partners are able to start and grow this new enterprise. To aid this, you should prepare resumes for all principals of the new business. If possible, get references from former colleagues or other community members who can speak to your relevant experience.
Get Your Personal Finances and Credit in Order
Because you don’t have a business (yet), your bank or lender will want to take a look at your personal credit report. We’d advise you to check your credit report yourself and take care of any problems first. Banks not only want to see borrowers with good credit scores, but borrowers who have a mixture of credit and loan accounts (i.e., credit cards, loans, mortgages, etc.) and several years of credit history. Your credit report will be a big factor in determining whether you can even qualify for financing.
Be Prepared to Offer Collateral, Personal Guarantee or Down Payment
You should be prepared to put up collateral, make a personal guarantee or provide a cash down payment—or all or some combination of the three. Because you won’t have business assets to pledge as collateral, you may be asked to use personal assets, such as your home, vehicles or savings, and/or make a personal guarantee that you’ll repay the loan in the event the business cannot. What’s more, these pledges may be combined with a 10% or more cash down payment on the loan. Startups are risky, so banks want to see that entrepreneurs have some skin in the game, so to speak, to reduce the risk that their money will be lost if the business fails. So if you’re asking for $100,000, a lender may expect you to pony up $10,000 of your own money for the loan.
Detail What the Loan Will Pay For
Most new entrepreneurs make the mistake of not accurately estimating how much money they need. To combat this, make a detailed list of what you intend to use the loan to pay for and how much each line item costs. You should be as specific as possible. For instance, if you plan on purchasing inventory, detail the exact type of inventory and how many units you will need of each type. You can also include the price per unit in your estimates. Be sure to share this list with your lender as it will help your application get approved.
Register Your Business
Get your business registration, licenses and permits in order before applying for a loan. You’ll need to file (and pay for) these licenses, permits and registration through your state government. Normally, you can fill out these applications online.
Choose a Bank You Have a Relationship With
Never underestimate the power of an existing relationship when you apply for a loan. A banker who knows you will be all the more likely to work hard to get your application approved, or push their committees for exceptions. We recommend applicants start with the bank or lender they already use. If that’s not an option, see if you can get referred to another lender through a mutual connection.
What to Do If You’re Rejected for a Startup Loan
If you’re rejected, ask your banker or lender why. Most banks are more than happy to share the reasons why your business loan application was rejected. In many cases, the reasons for your rejection are fixable—something like a poor business plan or a lack of collateral can be remedied.
In other cases, when the solution isn’t so simple, consider asking your lender if you are eligible for other types of financing, such as contract, equipment or accounts receivable financing. Perhaps your bank will loan you money once you receive a contract from a client or once you commit to purchasing certain equipment or vehicles. Finally, consider finding another lender or bank. Just because your loan application doesn’t fit into a bank’s lending portfolio doesn’t mean that another bank won’t approve your application. Many times, it’s a matter of finding a bank that wants to work with borrowers like you.