Applying for Small Business Funding
In part one of this series, we looked at the different reasons for getting a small business loan and determined the right time to apply for loans based on what you want to do with the funds and your personal and business credit history.
In part two, we talked about the different types of loans that a small business can apply for from traditional lenders, specifically a bank or credit union.
Here, in part three, we'll discuss how to apply for small business funding. This includes gathering or preparing the documentation lenders want to see - from your credit report and financial information to your business plan. We'll also look at things that can help you get a loan - such as collateral, cosigners and personal guarantees. And we'll analyze why banks say no to small business loan requests, and what your next steps are if you don't get approved for a traditional loan.
Documentation Required for Small Business Loans
The documents you need to successfully apply for a traditional bank depend the type and amount of loan you're applying for, your business' history and profitability, your personal details, and your business' projected profits in the future. Generally a bank will expect to see:
Your Business Plan: this is critical, see below for details on what a plan should contain).
Your Personal Credit Report: Small businesses typically are approved or denied for loans based in part on owner's personal credit history. Check out the credit score section below to understand what the numbers mean.
Your Business' Credit Report: your business may have a credit score of its own (and if not, you should start building that score). See the credit score section below for more information on this.
Income Tax Returns: banks typically want to see three to five years of your personal returns, and potentially business returns as well.
Financial Statements: you'll need to create (or, much better, have your accountant create) monthly or quarterly financial projections for the next year, then quarterly and/or yearly projections for the term of the loan.
Bank Statements: your personal and business bank statements for the past 12 months.
Collateral Documentation: you will need to prove that you own the assets you will pledge as security for repaying the loan. Documentation could include titles, contracts, deeds and receipts. The bank may also ask for valuation proof, such as insurance coverage.
Other documentation: depending on the type of business you have, the bank may want to see your business licenses and registration, insurance, leases, articles of incorporation, third-party contracts (with suppliers, or customers), franchise agreements and similar information.
As noted above, requirements differ depending on the lender, the type of loan and your business. Begin by identifying potential lenders – such as your own bank or credit union, or the small business administration. Then find out what type of documentation they require. You may want to start your research three-to-six months (or even a year) prior to actually needing a loan, so that you can gather/prepare the documentation you need, work on improving your credit score, and assess what you can offer as collateral.
Below are further details on the documentation that tends to be the most challenging: credit scores and business plans.
Understanding Your Credit Score
If you own a smaller business, the bank typically looks at the business owner's personal credit score when deciding whether to approve a loan. If your personal credit is overextended, or you don't have a high score your loan will likely be rejected.
Your credit score is a three-digit number that indicates the level of risk a lender accepts when they loan you money. You have several credit scores, and they vary by credit reporting company. The ones that most lenders look at are VantageScore 3.0 and FICO 8.
Overall, here's how it works:
- 300-629: Bad credit – you will get turned down for business loans by traditional lenders and will likely only be able to access secured credit cards/lines of credit. Note that your score is based, in part, on how much and what type of credit you currently have – it doesn't always indicate that you didn't pay your creditors. A low score may simply mean you don't have an extensive credit history.
- 630-689: Fair credit – this is also considered “average” credit. You may be able to get credit cards, but at high interest rates. You are unlikely to be approved for a traditional loan, unless you have a co-signer and significant collateral – and even then, you may not be approved.
- 690-719: Good credit – You will have a much easier time getting credit cards or lines of credit but may still not qualify for a small business loan from a traditional lender.
- 720 and up: Excellent credit – congratulations! 850 is an almost impossible to reach score, but anything from 720 up is outstanding.
You may also have a business credit score, these run from 1-100, and the higher the better. A business score of 75 is considered excellent. If you don't know what your business credit score is, apply for a DUNS number, so that you can access your business credit report from Dun & Bradstreet. If your business doesn't have a score, once you have a DUNS number, you can begin to establish a business credit history.
How To Write A Business Plan
Banks (and investors) want to see your business plan. A well-written business plan details your marketplace, your company's value proposition and your growth strategy. You are making the case for the profit potential and trustworthiness of your business.
There's no standard format for a business plan, but you should plan to include much of what is outlined below.
Executive summary: a short but very persuasive overview of your business.
Description of your company: explain what you do and why you do it.
Market analysis: detail the financial opportunities of your market and provide an overview of what your competitors are doing. Remember, if you have no competitors, it may mean that there is no need for your product/service.
Unique value proposition – what are you doing better/faster/cheaper/cooler than your competition? And why does it matter – what proven need does your business address? You want to explain why and how you fill a currently unanswered need in an industry that has great growth potential. Quote authoritative sources such as financial and industry experts, as well as reporting from respected news sources.
Customers: who are your customers, and how do they engage with your business? Detail your target markets.
You and your team: Your background and experience, and – if you have a leadership team – their qualifications. Focus on the achievements needed to build your company's success, addressing the risks that investors might see – e.g.: “I wonder how all these engineers will promote this product? Oh, ok, I see they have an experienced digital marketing expert on their team.”
Service or product: What are you offering and why will it be a success? Have you created it already? Do you have contracts with suppliers (or other partners) in place? Can you ramp up quickly to meet demand or is this a product that will appeal to an audience that values limited availability?
Marketing and sales: explain how you will promote your product/service, and how you will bring the product to market – do you sell it in stores, online, in a restaurant, through vendors, by subscription, etc.?
Funding request: if you are looking for investors or a loan, detail how much money you'll need over the next 3 to 5 years, how you'll use the funds and what profits you can reasonably anticipate gaining from these actions. Your anticipated profits should be higher than the amount you wish to access/borrow.
Appendix: here you can include résumés, business permits, supplier contracts, licensing agreements and other documents that substantiate the points made in your business plan.
Why the Bank Said No (And What to Do About It)
No matter how wonderful your business plan and credit score is, you'll probably still struggle to access working capital from banks. The application process is complex and demanding, requirements are strict, and banks aren't thrilled about extending loans to small businesses. You may not have the time, know-how, patience or credit history to qualify for the same financing options that were designed to meet the needs of big businesses.
Even if you don't qualify for a traditional loan or need funding faster than the month or two it typically takes to process a bank loan, you have options. Alternative lenders offer innovative funding products specifically designed to meet small business needs. In fact there are so many alternative options that we're devoting part four of this series to alternative lenders and the types of funding that they offer.
But if you don't want to wait, the easiest way to find an alternative lender is to get pre-approved by One Park Financial, which then gives you access to a funding expert who can discuss your business needs and options to determine what funding types best meet your needs.
One Park Financial works to help owners of small and mid-sized businesses access the funding that meets their needs. Established in 2010 and founded by entrepreneurs, One Park Financial understands the challenges associated with small business loans and their need for working capital. Visit oneparkfinancial.com or call 855.218.8819 and connect with a funding expert to discover the options that make sense for you and your business.