The process of shopping and applying for a small business loan can be overwhelming, leaving many first-time borrowers unsure of where to start. With the looming pressure from so many lenders to “Apply Now!” it can be all too easy to jump to the first small business loan application you see without taking the necessary steps to shop for the right product and prepare an application that will yield the results you want.
Before getting ahead of yourself or cutting corners that will cost your business, use this checklist to get the right small business loan for your needs at the best possible price.
Check your credit report
As a small business owner, you may be surprised to learn that your personal credit score is the single greatest factor that will determine your qualification for a small business loan.
A credit score of 700 is considered excellent. If your score is 620 or above, you should have plenty of options. A score over 520 will still give you some options, though you’ll be limited. If your credit score is under 500, it will be very hard to find loan options.
Keep in mind that different agencies use different reporting methods, so it’s important to check with all three of the major reporting bureaus—Experian, Equifax, and TransUnion—to determine your score with each.
Not loving what you see? Check your credit reports for errors, and report any inconsistencies you find in writing to the bureau in question. If you’re concerned that poor credit may hold you back from getting the small business loan of your choice, consider taking steps to strengthen your personal credit before searching for a small business loan.
Collect your business and financial documents
Your lender may request many types of documentation related to your business, so the sooner you collect and organize those documents for submission, the easier your loan application process will be.
Document requests can vary from lender to lender, but these are the basic business documents you can expect to provide when you apply:
Business organization and legal documents:
- Articles of Incorporation, Shareholders Agreement, LLC Agreement, Partnership Agreement, Doing Business As filing, or similar
- All relevant business licenses and permits
- Title deeds for any real estate owned by the business
- Patents, copyrights, trademarks, or other proof of intellectual property rights
- Lease documents for all business premises
Banking and tax documents:
- Business income tax returns from the past two years
- Property, business, sales, municipal, or other tax statements
- Bank statements from the previous six months
- Payroll records from the past six months
- Current balance sheet
- Profit and loss statement for the past year
- Accounts receivable statement
- Personal tax returns for the past two years
- Title deeds on personal real estate for possible collateral
Write your personal and business background statements
Though it's not required by all lenders, writing a statement detailing your personal and business background can help to build trust with your lender, making them more likely to forgive small flaws in your credit report or your business’s financial history.
Think of your personal background statement like a professional resume. It should include your educational degrees, any relevant professional licenses or skills, and work experiences you had before starting your business.
Similarly, your business background statement should detail the history of your business and synopsize where it stands today. Include when and how you formally incorporated your business, your initial and current product lines, number of employees, gross sales, revenue, profit margins, and more. This is your opportunity to market your business to your lender, so approach it thoughtfully.
Polish up your business plan
Lenders may request an updated business plan that offers a current overview of the following categories:
The historic structure of your business: Describe how and when your business got started; your past products, vendors, and cost of goods; your net revenues broken up by product type; your number of employees, when they were hired, and total payroll; and an analysis of your historic cash flow.
The competitive structure of your market: List your primary competitors with a brief description of their businesses and explain how your product or business stands out from the competition.
Your projected business plan: Talk about what’s next for your business, how you plan to use the funds from your loan, and—most importantly for your lender—how you will increase revenue in order to make loan payments on time, every time.
If you’ve never written a formal plan for your business and aren’t sure where to start, the U.S. Small Business Administration offers an excellent guide that can walk you through the process.
Shop around for your options
Yes, you read that correctly. In this checklist, we are just now getting around to shopping for your loan. But there’s a good reason for this: Having taken the time to think through and prepare all of the pieces above, you are totally prepared and informed to find the right small business loan product for your needs and objectively consider what products you are likely to qualify for.
Look to your projected business plan to find the right loan product based on your planned use of the funds. Planning to buy equipment? Consider an equipment loan. Will it take awhile to recoup your investment? Shop for longer term bank or alternative loans—rather than a short-term loan product—to ease the stress of paying back quickly.
At the same time, objectively reviewing your credit report and financial documents will help you determine—from the perspective of an underwriter—whether you are likely to qualify for your ideal loan product. This will save you from wasted time submitting applications, only to be rejected and forced to start again.
Complete your application
If you’ve properly completed the steps above, this should be the easy part. Work with your lender or a certified loan broker to complete the application for your chosen loan product. You’ll be asked for basic identity information about yourself and your business, and then all additional information should be easily accessible from the documents you’ve prepared. As long as you’ve prepared adequately, the average online loan application should take under an hour to complete.
Read the fine print
Before you commit to anything, it is absolutely critical that you understand the terms of the loan agreement. Read every piece of the fine print very carefully before signing, paying special attention to terms relating to the Annual Percentage Rate (APR), late payment or prepayment penalties, and any terms that may allow for changes in the interest rate or acceleration of the due dates for payments.
The loan agreement that you sign is legally binding even if you don’t fully understand the terms, so if you’re not entirely comfortable, consider seeking legal counsel before moving forward.
Sign the dotted line
Congratulations on your new small business loan! While the loan application process can be overwhelming if you’ve never done it before, the steps you’ve taken have not only helped you obtain the right small business loan for your needs, but will also put you in the best possible position for success as you enter the next chapter of your business’s growth.
Meredith Wood is the editor-in-chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. She is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more.