What Should You Do Before You Apply for a Small Business Loan
1. Determine how much funding you need. Examine your business expenses and consider how much of a loan payment you can afford. You can find out how large of a loan your business can afford by calculating you Debt Service Coverage Ratio.
The formula is a simple one: net operating income / total annual debit payments = DSCR.
Lenders are looking for small businesses to have a minimum of a 1.20 ratio. This means your cash flow is 1.2x your monthly loan payment. Remember, 1.2 is a minimum target so the higher the multiple the better. For example, if your annual net operating income is $135,000 and your total debt is $100,000, your DSCR is 1.35.
2. Check your credit report. Your personal credit report is a crucial part of the small business loan application process, as lenders often consider your personal credit, especially with startup business loans.
Carefully review your credit report so that it's free of errors and identify and resolve problem areas. Inaccuracies on your credit report can hurt your chances of getting a loan approved and may negatively impact you score. It's important to try and clear these up before beginning an application process. You can order a free credit report each year from all three credit bureaus on annualcreditreport.com. A personal credit score on the FICO scoring system ranges from 300 to 850.
3. Draft a strong business plan. A solid, comprehensive business plan is the foundation of your small business and shows potential lenders how profitable your venture is.
A business plan includes:
- A summary, which provides an overview of your plan.
- The primary products and/or services your business will offer.
- You and the management team's skills and backgrounds, and how they relate to the success of your business.
- Who your target customers, market and the competition are.
- Your sales and marketing plans.
- The organization and management team, which includes the setup and responsibilities.
- Financials, such as the estimated cost to start or grow the business, a breakdown of ongoing expenses and what the funds would be used for.
- Projections, which include projected income and balance sheets for the first few years.
- An Appendix, which provides supporting documents for your business plan.
4. Talk to a business mentor. A business mentor can help you tighten up your business plan, connect with resources and more. You can find a business mentor through professional associations, former employers or networking mixers. A couple other options are, the Small Business Development Center (SBDC), who's mission is to promote entrepreneurship and small business growth through offices that are hosted by local organizations and funded in part by the government and the other is Score, which is a nonprofit group with volunteer business counselors throughout the U.S.
5. Connect with Croghan's Small Business Lending Expert. We take a consultative approach to understanding the need for access to capital and work hard to identify solutions for credit. There are many lending products out there for financing and some, like the SBA Loan Guaranty Programs, require less money down so you can keep as much cash in the business as possible. Most small business owners are busy working "in" there business rather than "on" their business. We would like the opportunity to help you work "on" your business. Please contact us today to start the conversation.