These days, speed and convenience drive most of our business decisions. So when you hear about the time and energy it takes to apply for a traditional small business loan, you may not even try. I can’t say I blame you.
But, if you’re like most businesses, you need access to capital. That’s why you’ve probably heard about, or used, alternative lenders. These loans can be great because:
- You’re more likely to get approved
- The application process is fast
- You can get cash in a few days versus a few weeks
Of course, you may pay thousands of dollars more per month in interest for this convenience. That’s money that could have been reinvested into your business.
To save a bunch of cash by getting the best loans, you just need to plan and practice some patience. Here are four steps to take before you apply for any loan.
1. Know where your credit stands
Your personal and business credit scores are one of the first things a lender will look at when evaluating your loan application. Know where you stand before you apply.
To get loans with the best rates, like a traditional bank or an SBA-backed loan, you’ll need healthy credit scores. Otherwise, applying for these types of loans may be a waste of time.
For instance, the Small Business Administration now uses a small business credit score to pre-screen most of its loan applicants. Fall below the minimum score, and you may eliminate yourself from getting one of the cheapest loans available.
Plus, right now the SBA is waiving upfront fees on loans up to $150,000. This is usually 2-percent, which equates to a couple thousand dollars. That’s money you could use to invest in advertising, or give yourself a paycheck!
2. Take steps to improve your credit
Even if your credit isn’t the best, don’t get discouraged and assume you’ll never qualify for the best loans. You may be able to increase your business credit scores by doing some simple things:
- Check your reports for errors. 25% of small business owners found errors on their business credit reports that put their business in a riskier category. These damaging mistakes could be something as simple as a crossed up business name or an incorrect SIC code.
- Build your business credit profile. Make sure your vendors and suppliers are reporting your payments to the bureaus. They’re not required to do it. But this positive payment activity builds your business’s credibility.
- Continually monitor your credit. As you build your credibility, you’ll want to protect it. With monitoring and alerts, you’ll always know exactly where you stand, so you can avoid any negative surprises the next time you need financing.
3. Get your business plan dialed in
Your lender is going to want to see a solid plan business plan. If you don’t have one, it’s time to buckle down and write it up. Even if you have one, and things have changed, you’ll want to make sure your plan’s updated.
It should look out 3 to 5 years and outline what the opportunity is and how you plan to execute to grow revenues. Although forward-looking, business plans are not set in stone. Think of it as a living roadmap for your company’s success.
If you need help, the SBA’s free Build Your Business Plan tool can guide you through the process.
4. Understand the financials
It’s tempting, but don’t just rely on an accountant. You should know exactly what’s going on “under the hood” of your business.
Be prepared to show your lender your profit-and-loss statement and at least one year’s worth of projected financials (like expected revenue). You’ll also want to be able to explain exactly how you’ll meet the revenue goals, and how the loan will help you get there.
Fortunately, plenty of software platforms—like QuickBooks—exist today that make it easy to understand your financial reporting and help you stay on top of cash flow.
These four steps are no quick fix, but they work. Take the time to button things down before you apply and you can save thousands the next time you need business financing.
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