Starting a business can be overwhelming — especially for new freelancers who need a source of capital before they can launch. While some indys may save up money at a full-time job before going it alone, others are faced with applying for a small business loan for the very first time. Here’s an overview on why some freelancers seek out business loans, and what you need to do before speaking with a lender.
Applying for a Small Business Loan
When I first started out on my own, all I needed to get up and running was a new computer and the motivation to make a name for myself. But I’m in the minority. There are plenty of professionals out there who need to accumulate enough capital before they can launch their business. For those of you working a 9-to-5, saving a percentage of your salary can help, but it might take years for you to accumulate enough to branch out on your own.
For example, consider a carpenter who wants to start his own business. He may already have some of his own supplies, but chances are that most of what he uses in his full-time job is owned by his employer. That means he’ll need to purchase tools, storage and maybe even a truck to haul everything he needs to house calls. And what if he wants to operate out of a brick-and-mortar location?
Applying for a small business loan is one of the only ways some indys with large startup costs can get the funding they need. But newbies aren’t the only professionals who might have to refer to a lender for help. Some self-employed professionals can afford to cover their startup costs, but need a loan when it’s time to expand.
So, what steps do you need to take before applying for a small business loan?
Check (and Possibly Improve) Your Credit Score
Before you even start the application process, you need to know your numbers. Your credit score is just one of the many digits that play a role in whether or not a bank will approve a small business loan. First, make sure your credit history is current and error-free. If you do find errors, work with your credit agency to get them removed before applying.
Most lenders look for a credit score of 700 and above, while scores 650 and under may come with very high interest rates — if you’re approved at all. If your number is lower than you’d like, take some time to improve your credit score before applying. But remember: If you’ve already been in business for a while and had a past loan or use a business credit card, you may have a business credit score in addition to your personal score. Both scores and credit histories will be considered when you apply for a small business loan this time around.
Pay Down Old Debt and Save Your Money
Having a lot of outstanding debt is a red flag to lenders. This doesn’t mean having a mortgage will ruin your chances of getting a business loan, but it does mean that extraneous debt on credit cards or loans make you a riskier lendee. Try to pay down as much debt as possible before applying. Then, start saving up some cash reserves. The more savings, the better. It’ll show your lender that you’re able to make a deposit on the loan if necessary — and that you have money set aside to make payments if business is slower than expected.
Shop Around for the Right Lender
Not all lenders are equal, and you can choose from banks, credit unions, online banking systems and even some credit card companies for a small business loan. Do your research on each possible option, then apply to your top three choices. Just remember: Each time a lender checks your credit history, it can affect your credit score. But it won’t do too much damage to your lending potential if it’s done within a short period of time. According to myFICO, “…If you find a loan within 30 days, the inquiries won’t affect your scores while you’re rate shopping.”
Bring a Business Plan and the Necessary Financial Documents
Sure, you can show up to an appointment with a lender holding just an executive summary — a one-page summation of your entire business plan and a few financial documents. But if you really want to impress them, you’ll want to come prepared with a complete business plan, including the concept, competitive landscape, targeted market and a marketing plan.
And don’t forget about the financials — the most important part of your application. The bank will want to verify your income, so you should come prepared with as many documents as possible. That means you’ll need the following:
- Records of your taxes from the last two years
- Profit and loss sheets from your accountant or bookkeeping software
- Printed documentation of any assets and debts
With these items in hand, you’ll be more prepared to answer a lender’s questions — making it even easier to prove that you’ll be a reliable lendee.
Borrow Everything You Need
Don’t be shy when it comes time to ask a potential lender for money. It’s important to forecast exactly how much you’ll need, because it’ll be much more difficult to ask for a second loan if the first wasn’t enough. Remember: You not only need money for physical tools or inventory, but you might also need administrative overhead for a lease, utilities, insurance or legal and accounting fees.
Throughout your planning process, spend some time determining exactly what you need from a small business loan and the ideal place from which you can attain one. After all, being well-prepared and ready to prove your business’s potential will make you the ideal candidate to any lender.