1. Show you have the skills to manage your business
Most start-ups and early stage businesses don’t have hard assets like equipment or a building to offer as collateral for a loan. That means a banker will have to decide based on his or her assessment of your ability to deliver on your business plan.
“The person running the operation is vital to the success of any company, especially a start-up,” Holt says. “We’re often relying on the experience and expertise of the person running the company.”
The person running the operation is vital to the success of any company, especially a start-up.
That’s why it’s important to highlight any business education and experience you and your management team have. You should also be ready to discuss where you will get outside advice. Do you have family or friends in business? Do you have a mentor? Are you ready to pay advisors to help you in such areas as financial management and marketing?
“Sometimes entrepreneurs aren’t willing to seek advice,” Holt says. “The ones that are successful do it very well. They recognize they have skill gaps, and they go out and find someone to help them with that.”
2. Do your research
Bankers need to understand your business model—how you expect to take market share from your competitors and make profits. They’re looking for a well-researched business plan, covering such areas as marketing, operations and human resources. It should also include realistic financial projections for the next 18 to 24 months.
“Many entrepreneurs are very optimistic,” Holt says. “But they haven’t put the effort and research into things like: What’s the market size? How am I going to attract people?” Holt says. “You need research and data that shows us your projections and assumptions are realistic.”
3. Invest in your company
Bankers want to see you’re willing to share the risk by putting your own money into the business. They will also look to see if you have other investors who believe in you and your project enough to put their money on the line.
Investments not only show commitment to the company’s success, but they’re also a source of patient capital, Holt says. Your investors will usually be willing to wait for repayment until you achieve profitability or get over a rough patch. They may also invest more to support the business.
“We look to see what kind of a financial support system you have,” Holt says. “Do you have people who could invest in the company if you need a further injection because things aren’t going quite as well, or you’re growing and need capital?”
4. Know your personal credit history
Banks now use algorithms to help them decide whether to grant small business loans. An important factor in evaluating your loan application will be your personal credit history as reflected in your credit rating from credit bureaus, such as Equifax and TransUnion.
Holt says you should know your personal credit rating to facilitate your initial conversation with your banker. It’s a piece of information the bank will learn during its due diligence on your loan application so you should know it too.
If you have poor credit history, there are steps you can take to improve your credit score before applying for a business loan.
“There’s lots of data that shows if your personal credit is good, you’re probably going to pay back your business loan, and if it’s not good you’re probably not,” Holt says. “Just knowing your own personal finances helps gain credibility with a lender.”
If your loan application is turned down, it’s a good practice to ask your banker to explain why you weren’t successful so you can improve your loan proposal the next time, Holt says.
“Your plan, your projections, your investment, your personal credit—these all come into play and they’re all things you can work to improve.”