4 Pain Points in Your Small Business Loan Application
Capital. Every small business owner needs it, but not everyone is prepared to take on the adventure of getting it. Obtaining a small business loan is much more than filling out an application and crossing your fingers that you’ll get approved. It’s an experience that you can either wallow in, or excel at, and come out from the other end with the resources that you need to grow your business.
Read on to discover the four pain points in your small business loan application, and the tips and tricks that you can use to conquer the quest for capital.
Finding the Right Relationship
Running a small business is anything but predictable, and knowing when you’re going to need capital is no exception. The first step to sourcing a small business loan is to find the right lender. The trick is to cultivate that relationship before your capital needs surface.
Start your search at your local bank. If they offer small business loans, great; ask to speak with the appropriate representative, introduce yourself and your business, and express your interest in learning more about their lending processes and terms.
If your bank doesn’t offer small business loans, or if you can’t comply with their terms, turn your focus to collecting community referrals. Lending is all about relationships, even between lenders. Don’t be shy about asking for a referral to another lending organization. Often banks already have these referral relationships in place, it’s just up to you to ask.
Beyond traditional capital sources, there are organizations such as Community Development Financial Institutions (CDFIs) that are designed to offer more flexible lending terms, and can make loans that traditional lenders simply cannot. The Small Business Administration (SBA) is another great resource to turn to for a variety of nontraditional loans.
Whichever route you take, this step is all about being proactive and cultivating relationships to build a foundation that can support your future lending needs. So don’t wait. Waiting to do the legwork when your capital needs are pressing could leave you in a vulnerable position.
Feeling apprehensive about reaching out? Don’t be! These lenders are excited to talk to you, even if you’re not looking for a loan right now. They’re also keen on relationship building. Bonus: as a responsible, proactive small business owner you’ll begin to cultivate one of the 4 Cs of credit: your character.
What You Think and What You Need: Two Different Things
With your lending relationship in place, it’s time to tend to it. A small business owner who claims that they need $X for a loan, when in reality they need $Y, raises suspicions that they don’t know the true state of their business. This is a major red flag in the lending community. Make sure that your capital ask is grounded in the reality of your business.
Building a strong case will require you to look at historical trends and make sound projections. For example, if you’re seeking out a loan to purchase a new piece of equipment that will help you ramp up production, do the math so that your needs are concrete. Project how much this investment will increase your capacity by, and thus, how it will affect your ability to pay back the loan. The key is to use as much data as possible to show that your ask amount and repayment plan are both thoughtful and grounded.
In addition to being realistic, be aggressive. A common misconception among loan applicants is that the smaller amount you ask for, the better. However, when you ask for $50k — and in reality your business needs $150k — you’re doing yourself a disservice. Your lender won’t be able to make an additional loan before you’ve satisfied your first one. Moreover, coming back to ask for more raises unwanted suspicions that you aren’t tuned into your business’ needs. Or worse, it makes lenders worry about the changes in your business climate, now that you’re suddenly asking for $100k. What’s changed? What’s wrong? You don’t want to rock this boat.
Seek out a financial advisor, bookkeeper, or accountant to guide you in exercises that will ground your loan amount ask. There are plenty of nonprofit organizations that can match you with these types of mentors for free. Consider asking your potential lender if he/she can suggest someone to work with you; after all, that’s why you built this relationship in the first place!
Getting All of Your Docs in a Row
As you likely discovered through your lender relationship, there are plenty of documents that you’ll be required to submit as a part of your loan application. As a general rule of thumb, almost every prospective lender will ask for at least two years of financial statements, balance sheets, and income statements. You’ll also want to be prepared to present upfront any personal financial standings that may implicate your ability to take on debt (i.e. your personal credit cards), as well as your ability to put up collateral.
Once your documents are submitted to a lender, they’re working hard to get you an answer as soon as possible. In reality, this step of getting all of your documentation in order is the step that can delay the loan process the most.
Learning what documents you’ll need to submit upfront and being proactive in your approach are key. Not only will you get through the process faster, but being prepared and responsive presents you as an ideal loan candidate. Small business owners who can’t get their stuff together in a timely manner make lenders question the viability of the potential loan.
Make the effort now by committing to a monthly reconciliation process that works for you. It’s OK if you’ve fallen behind, you can hire people or seek out financial volunteers to help you catch up. And, if you decide to never seek out a loan, this will not be wasted effort. Should the IRS ever come knocking on your business’ door, you’ll be ready. Most important, having a clear view of your business landscape, and having a mastery over all of its moving parts, will help you make informed decisions for your business now and in the future.
When seeking out a small business loan, having the right attitude in place will serve you and the process well. Nine out of ten lenders want to make a loan deal work for you; unfortunately they cannot make this happen alone. Understand that there will be some back-and-forth throughout the loan application process; your willingness to support that process is critical. While the right lender should set timeline expectations for you about the process, patience is something to keep by your side.
Also, don’t be fickle. It’s common for lenders to see loan applicants who get turned down, take their same documents and their same lending story to someone else, hoping for a different answer. It’s important to recognize that change starts with you. Listen to lenders’ explanations as to why they cannot fund you right now. If your books are a mess, invest time to get them in order. If your credit score needs help, make the necessary efforts to give it a boost. Be willing to do the work. Lending is not a one way street, and it’s sunnier with a positive, purposeful attitude.
Are you thinking about pursuing a small business loan? What other questions do you have about the process? Share your thoughts in the comment section!
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