1. Create a business plan
You will need to create a detailed business plan for the lender. This should be the first step before you shop for loans. Without a business plan, a lender may not even review your application. Below are the key items we suggest you include:
- Executive Summary: An executive summary should describe you, your experience, your previous experience, your business, your team, and exactly how the money will be used. This is your opportunity to sell yourself. Also, be sure to include how the money will help increase profitability so the lender has assurance that you will be able to repay the loan.
- Business Profile: You should summarize what your business does and/or what service or products you offer. You will also want to describe your market, target audience, customer profile, and the industry itself using metrics to describe the opportunity and future opportunities.
- Management Experience: Most lenders will want to know the history and experience of each key member of your management team. You may want to also include how many people you employ and a general overview of how each person contributes to the overall success of the business.
- Loan Amount: This is a critical part of the business plan. List the loan amount you are requesting and create a detailed report about how the money will be used. Be sure to include prices, quotes, proposals, and any other documentation that can substantiate your report. Lenders like to see exactly where the money will go.
- Collateral: Describe the collateral you will use to secure the loan. Most lenders require at least one form of collateral that can be leveraged in case your business doesn’t have enough cash flow to repay the loan.
- Repayment Plan: You should propose the terms on how you plan to pay the money back. This can include the interest rate, term of the loan, and when the payments commence. A detailed repayment schedule should be based on sales or cash flow projections. Negotiate the loan terms with your lender. The risk assessment of your business will determine the approval. You should also identify at least two sources of repayment. One can be the cash flow generated from business and the second can be the collateral used to secure the loan.
- Financial Projections: This is a report that describes how the business will remain profitable over a longer period of time, especially during the duration of the loan. You will want to prepare the projected income and cash flow statements for each year. If something unforeseen happens and you do not reach your projections, you should have an alternative plan prepared to prove how you can change your operation plan if necessary.
2. Know both of your credit scores
Lenders will require a good credit history and a good credit score for both you personally and for your business. A good personal credit score is generally 680 or above while a good business score is between 80 and 100. You can learn more about business credit here or read about the new ways lenders are determining if you are creditworthy.
3. Calculate your debt-to-income ratio
You will need to know your debt-to-income ratio (DTI) before you apply for a loan. An ideal DTI is 36% or lower. Determining your DTI ratio is simple. Take your total monthly debt and divide it by your monthly income. For example, if your monthly debt totals $5,000 and your monthly income totals $15,000, then your DTI calculation is: $5,000 ÷ $15,000 = 33% DTI.
4. Prepare your financials
Most lenders will want the following financial documentation before they approve your loan:
- Tax Returns: 3 years of business tax returns, 3 years of personal tax returns, applicable K-1 schedules (one for each owner/guarantor with 20% or more ownership)
- Bank Statements: 2 months of business bank statements, 2 months of personal bank statements (one for each guarantor)
- Business Statements: Profit and loss statement, balance sheet, (current) accounts receivable aging report
- Personal Financial Statement: This is generally provided by your bank (one for each guarantor)
5. Find a lender
There are many lenders to choose from. You’ll want to find the right one for you depending upon your circumstances, including your credit history, length in business, and how quickly you need the money.
- Traditional Banks: They usually have the best rates but have strict criteria and can take a long time for approval.
- Small & Community Banks: Small and community banks are eager to compete for your business and the criteria is usually similar to the traditional bank. However, they may also consider your business’s reputation as well as your financial picture.
- SBA Loans: The SBA provides many financial assistance programs specifically designed for small businesses. However, they generally take 2-4 months for approval, and they require a lot of paperwork which can be overwhelming.
- Online Aggregators: Online aggregators are a good place to start your loan search. Magilla Loans enables you to shop and compare loans from multiple lenders including the SBA and traditional, small, and community banks. You can learn what rates you qualify for and what amount of money a lender will loan you.
- Alternative Lenders: If you have less than perfect credit and need the money fast, alternative lenders can be a good option. The criteria is usually lower than the SBA and banks, but the rates are often quite a bit higher. Alternative lenders may also have less than ideal terms.