Finance Your Business
7 steps to getting a business loan
A checklist to help businesses set up effective invoicing and collections
Planning and preparation are make or break priorities when you're seeking financing for your business.
Larry Conley, Senior Vice President and national specialty finance manager at JPMorgan Chase, advises that you start laying the groundwork long before you need the funds.
Improving your financial profile to impress potential lenders can take time, so the earlier you start, the better. Here is a checklist of steps to take before you apply for financing:
- Establish a banking relationship: Building a rapport with your banker long before you need to borrow can put you in a stronger position to secure funding. Even if you ultimately don't apply for financing with your bank, your banker can become a valuable business advisor. If you do apply, your banker is your representative and advocate.
"Bring your banker out to your business, and show them what you're doing and what your plans are," Conley says. "By the time that banker leaves, they will probably be your strongest advocate."
- Detail your plan for using funds: Be prepared to tell prospective lenders how you'll use the financing and how it will help generate revenue. For example, if you want to buy a delivery truck, estimate how much money you expect to bring in from offering expanded delivery to your customers. Having a clear vision for the funds—both how you'll use them and how they'll contribute to your repayment plans—will signal to lenders that you intend to put them to good use.
- Improve your credit profile: Request a copy of your business and personal credit reports and scores from the major credit-reporting agencies, including Dun & Bradstreet, TransUnion, Experian and Equifax. Review the tips to improve your score and take steps to correct any inaccuracies in your payment history. If your positive payment record with a supplier is missing from your business credit report, contact that supplier to request that your payments are reported—that may boost your rating.
- Pay down existing debt: Reducing your current debt is often the quickest way to improve your credit. Aim to lower the balance on your business credit cards if they're high, which immediately impacts your business credit rating. It's best to keep your balance at 20 to 30 percent of your credit limit, according to Experian.
- Evaluate potential lenders: Research lending programs offered by your bank or other sources. Review the types of financing they offer so you can get a sense for which option best suits your needs.
For many business owners, loans backed by the Small Business Administration—or SBA loans—may be more accessible than conventional term loans, so consider looking for a lender that offers this option. No matter what types of financing you consider, take note of lending requirements, repayment periods and fees.
- Get your numbers in shape: Lenders will evaluate financial details such as your sales, sales projections, expenses and financial commitments, and cash flow to ensure you're well-positioned to repay the financing. Go over these figures with your accountant, updating them and looking for opportunities to improve them.
Be sure your business and personal finances are separate, so that you have a clear picture of your business's performance. Lenders will want to see that your company's cash flow can accommodate debt payments as well as unexpected expenses. "Lenders will generally want to see that for every $1 of debt payment, there's at least $1.20 in cash flow," Conley says.
- Assemble key documents: Prospective lenders will let you know which documentation they need to review your company and finances. Requirements will vary, but banks and the Small Business Administration typically request business and personal tax returns, a current profit and loss statement, and business licenses and registration. Get these ready ahead of time to expedite the process.
Your business banker can be a valuable resource as you prepare to apply for financing. Along with helping you evaluate financing options, he or she can provide advice to help grow and strengthen your business.
Elizabeth Heichler is a Chase News contributor. She focuses on business and technology issues. Her work has appeared in CIO magazine, Computerworld, and PC World, among other media outlets.