8 Steps to Landing a Small Business Loan

Whether you’re applying for your first small business loan, or your 10th, you’ve got to bring proof of your “bankability.” Convincing a bank you’re worth the risk, and dependable enough to pay them back, is a combination of cold, hard, numbers, and “soft stuff,” like your character, level of organization, and how you present yourself. Putting it all together can be daunting, but these tips — in conjunction with working closely with our expert business counselors— will reduce your stress and add certainty to the process.

Here are eight steps to landing the small business loan of your dreams:

1. Get your ducks — and your docs — in a row

Banks are used to working with first-time borrowers, but how you prepare prior to contacting a bank can make a big difference in whether the bank sees you as an acceptable risk. Like a job interview or dating, that first impression might make or break your chances of moving forward. Your preparation and organization for this application speak to your character and management abilities.

You need to be prepared with a pro forma financial package showing cash flow, your balance sheet, and profit and loss statement. You also need to be ready to defend your application in a face-to-face interview.

How to win the bank over:

a. Know how much money you’re asking to borrow, and exactly what you will spend it on.

b. Respond promptly when the bank asks for more information or documents, because if they have to chase you down for every piece of paper along the way, they may start to worry that they’ll have to chase you down for payments.

You have the power to set the tone of the conversation,” said Josh Daly, an RI SBDC business counselor. He frequently works with clients whose loan applications may need work based on numbers, but who have been successful in landing a loan when they put their best foot forward. Working with an RI SBDC counselor is a great way to pull all the pieces together and practice your pitch before you approach a bank.

2. Check your credit score

Knowing your credit score will tell you a lot about where you stand and how to defend your application to the bank. The higher the number, the better. While 680 is reasonable, if you fall below 660, an RI SBDC counselor can help you look into credit repair.

There are some lenders who will approve your loan if you fall below 660, but be prepared for a much higher interest rate to account for the higher level of risk you present. While it’s important to regularly check your credit report for accuracy, those reports do not include your credit score. Some credit card companies include your score on your monthly statement or will provide it if asked. Further information about getting a copy of your credit score is available at the Consumer Finance Protection Bureau.

3. Look at the big picture

As part of determining how much money you’ll be borrowing, you may need to look beyond just the needs of your business. Are you quitting a job to start a company? Are your personal expenses covered while you get off the ground? Things like monthly living, mortgage, car payments, and college tuition can’t be paid for with good looks and entrepreneurial enthusiasm. An RI SBDC counselor will help you look into your global financial picture to come up with the bottom-line number you’ll be bringing to the bank.

4. Show off your team

Since you’re not the only one contributing to your company’s success, it can go a long way to present a good case for your team. RI SBDC counselor Dennis McCarthy suggests that this, too, is a character issue — that you, as the team leader, have chosen the right people to surround you, with complementary skills and experience. A written statement describing who is on the team, in what role, and how they are positioned to drive company success would significantly strengthen any application for a small business loan.

5. Research lenders

Just because your Aunt Sally got a loan from XYZ Bank, doesn’t mean you will — or should. Particularly if you’re on the cusp of bankability, finding the right lender is paramount. Do they lend to startups? Do they lend in your industry? Have they made similar loans in the past? Don’t be afraid to question the bank directly, or connect with an RI SBDC counselor for ideas on banks (even beyond Rhode Island) that may be very viable options.

6. Take “rejection” in stride

Don’t get too discouraged by hearing “no” from a bank. Getting turned down isn’t a personal reflection, and it doesn’t mean you should give up — it may just mean you didn’t fit their business model. Finding the “right” lender is a process. Be prepared to approach 3-4 banks, but if you are persistent you are likely to find capital when you need it.

7. Consider online lenders — carefully

Particularly if you are struggling to get a loan from a traditional bank, you have real options with online loans. But beware of slick marketing that makes something look too good to be true. The terms may be incredibly disadvantageous, in the form of high interest rates, fees, or very low short-term rates that have to be rolled over to exorbitant rates in 12-18 months if the loan isn’t fully paid off. Also watch out for interest rates that look great because the loan is very short-term, say, a 3 month payback period. Translate that rate into an APR (annual percentage rate) in order to compare it to a traditional bank loan. If you have a rock-solid plan for paying back an online loan, this could be a good option. Again, our small business counselors can help you dig into the fine print before you make a commitment.

8. Know when to walk away

A bank approved your application. Time to break out the champagne? Not quite yet. You’ve got to make sure the terms are agreeable and realistic. As part of preparing to apply for a loan, you need to know what monthly payments are doable, what loan term is acceptable, and what interest rate is just too high to make it worth it. That involves projecting your cash flow into the future and your debt-to-income ratio. It doesn’t put you in a better position to get a substandard loan even though it may solve an immediate problem.

At best, paying more for capital puts you at a competitive disadvantage, because you’ll have less money for marketing, staff, and production. At worst, overpaying for capital can mean the difference between becoming a RI business success story and going out of business. An RI SBDC counselor can help you evaluate and determine favorable terms, and decide when to go for it, so that champagne tastes great AND fits your budget!

Ready to take this advice to the next level? Register now for our Oct. 5th workshop, Manage Your Credit, Control Your Debt, Protect Your Identity, featuring three top financial advisors and CPAs. This event is co-sponsored by the RI Society of CPAs.