Preparing for a loan application is no easy task. In many cases, it is stressful and time-consuming. The sheer amount of loan options available and the level of documentation required can turn out to be overwhelming unless you get organized as quickly as possible.
While there are other lending options available, standard bank loans offer better rates and superior terms and conditions compared to other lenders. Assuming you are applying for the typical SBA (7)(a) loan, pay attention to the following steps to maximize your chances and insure yourself in case the loan does not work out.
#1 – Get Organized
The first step in acquiring a loan is being crystal clear about what you need it for. Once you know what it is needed for, you can determine what kind of loan is necessary, what range of interest rates will likely apply, and the terms and conditions of the loan itself. If you do not know what loan you are going for it will be impossible to prepare for it. Specific industries such as trade finance, medicine, or construction can also have certain rules in relation to loan agreements which could influence the application process.
Remember to explore all possible avenues before committing to a long-term endeavor. For example, you might decide to try out an alternative lending platform for a business line of credit from Kabbage or Ondeck. They can provide an unsecured business loan (i.e. without collateral) or even invoice factoring which may not be available from banks and institutions.
Do not start a loan process that you will not qualify for, as this is a definite waste of resources. Additionally, make sure that you get the timeline right. If you need the finance now, there is no point applying for a loan that has a typical 6-month approval process. Smaller loans tend to have a quicker turn around time.
In the context of a loan application, organization can also include legal, tax, and regulatory papers, as well as financial statements and accounts. Be as organized as possible in all relevant areas. This is also just good business practice.
#2 – Be Familiar with The Data
It is important to get all information with regard to loan success rates for your industry. According to the SBA, 20% of all loan applications fail, on average. However, some industries do have a higher chance of success (or failure) in terms of SBA (7)(a)loans. Run through this success rate by industry report from the SBA to understand the average loan application score of your industry, or read our summary here.
Restaurants have a 20% chance of failure for a loan, and this is typical for a lot of general industries such as retail outlets and bars. Other industries such as wheat farming and distilleries have a rejection rate close to 0%, while discount department stores have a rejection rate of about 40%. This is to do with the default rates for these industries, where wheat farming and distilleries tend to have very low rates of loan default compared to others.
#3 – Acquire All the Documentation in Advance
This can save some time down the line. It is better to get all of the relevant documentation in advance for the bank (banks process SBA loans), as there is an incredible amount of documentation associated with these kinds of loan applications. To qualify for an SBA (7)(a), you must –
- Prove that you are operating in the USA to make a profit and that the loan is for a sound business purpose.
- Prove that you have invested your own time and money in the company.
- Prove that you cannot obtain funds from any other financial lender.
Remember that the above are just the basic elements so you will be considered for a loan application. They are not anywhere near a guarantee of success. You will need all the documentation to prove the above. A business plan and financial statement are pre-requisites to the application, but more documentation will be required. The lending institution will tell you what documents you will need to obtain – While the SBA guarantees the loan up to 85%, it is the lending institution that processes the application. The type of loan will also determine what documentation is needed. For a full list of all necessary documentation, consult this file.
Among other items, you will need a lenders credit memo, an SBA form, a statement of personal history, a business valuation, a cash flow projection, sellers financials, real estate purchase agreements, and more. Because so much documentation is required, it is necessary to gather it as soon as possible, the process being long enough without delays. Some of these documents might take a long time to acquire.
The SBA loan approval process will depend on a large number of factors. The SBA even states that those with a bad credit score are welcome to apply. But in practice, those with a poor credit rating are highly unlikely to succeed in their application.
#4 – Have an Escape Route
Even if you provide all of the necessary documentation and believe that the company is in a prime position to succeed in the loan application, it could still be refused. Lenders are not obliged to accept the application. They are just given a guarantee by the SBA of up to 85% of the loan.
If your first loan is not accepted, then it might become necessary to proceed with an alternative financial route. Lending Club is a peer to peer lending platform for business loans up to $300,000. Micro-finance platforms are available which can also generate loans. They often require lots of documentation, but you will have all of this at hand from the previous loan process. An online lending platform is possibly the best route to take, as they can provide funding in less than 24 hours and process the application in minutes.
The basic requirements for the Kabbage lending platform are one year in business and $100,000 minimum revenue, as well as a 560 credit score. Ondeck requires $100,000, a year in business, and a personal credit score above 500. Fundbox does not even have these basic requirements: All that is needed is 3 months of transactions in a business account and $50,000 annual revenue. Needless to say, these requirements are far easier to satisfy compared to loans obtained through banks. If your loan fails, you can turn immediately to these platforms for fast financing.
#5 – Take a Long-Term Approach
It might be unlikely that you will get a bank loan today. But it is certainly possible to attain funding from alternative lenders in the meantime. You can make a habit of taking out short-term loans and paying them back, which will improve your credit rating. These kinds of unsecured business loans may not require collateral, in contrast to SBA loans where business owners nearly always have to put up their assets. They also offer business loans for bad credit, while the SBA generally requires a score above 680.
In fact, it could be a better bet to take out a quick short term loan now to gain the financial access that your business requires, compared to undergoing a lengthy loan process which may or may not succeed. If possible, the best approach could be to apply for an SBA while also using an online lender. If you obtain the SBA loan then you can stop using other services with higher rates.
Small business loans are difficult to acquire at the present time. It is always best to try and explore different ways to maximize your credit rating and to establish a relationship with a lender sooner rather than later.