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Obtaining a loan for your small business isn’t always a simple task. Depending on the factors that are present in your situation, a lengthy vetting process may take place. Knowing what to expect ahead of time can be very helpful.

Understanding Your Options

Before probing into what exactly lenders are looking for, it’s important to discuss the options that you have at your disposal. Each option is different and will come with a unique set of requirements. There are obviously dozens of different niche lending options out there.

The following three categories are what most small business owners will be dealing with when it comes to basic loans.

1. Banks and Credit Unions

The first method most businesses consider is a bank or credit union. The beauty of going the traditional route is that you actually get to go into a physical building and meet with someone face to face. For small business owners who prefer personal contact and communication, pursuing a loan with a bank or credit union is convenient.

The biggest issue with using a bank or credit union is that they have very strict requirements. If you don’t check all of the boxes, you aren’t going to get approved. This makes it an unrealistic option for many business owners who know they have weaknesses.

2. Online Lenders

The second option small businesses have is an online lender. Over the past few years, online lending has become much more popular and is now considered totally secure and legitimate.

The biggest challenge with online lending is finding the best small business loans. There are dozens of online lenders out there and more are joining the industry every year. You have to cautiously sort through your options and be careful to only work with reputable lenders who offer good terms.

3. Hard Money Lenders

Finally, there are hard money lenders. Because of the convenience and potential for customization, a lot of small business owners will only work with hard money lenders. A hard money lender can be an individual person, a business partnership, or even a small company that lends their own money to businesses and entrepreneurs in order to receive a certain return in the form of interest.

The great thing about hard money lenders is that they set their own rules and will often overlook deficiencies if they’re comfortable with the big picture. In other words, your bad credit score won’t be enough to scare away a hard money lender if you have the collateral to back the deal. The challenging thing about working with these lenders is that they usually expect a higher interest rate in exchange for their flexibility. 

The 5 Biggest Factors Lenders Consider

Regardless of whether you pursue a loan from a bank or credit union, online lender, or hard money lender, there are certain factors that typically come into play. Make sure you’re prepared in each of these categories. 

With that being said, let’s take a look at some of the biggest factors:

1. Detailed Business Plan

One of the first things you’ll be asked for is a detailed business plan. If you don’t have one, now’s as a good a time as any to begin developing one. At the very minimum, you’ll want to include the following:

  • An executive summary that sets the stage for your business and why you should be considered for a loan.
  • A description of your business, how it started, what value it provides customers, and what direction you’re heading.
  • Your company’s short-term and long-term goals.
  • A list of all people in positions of leadership and management, with quick blurbs on relevant experience and current roles.
  • In-depth descriptions of each of your products and services.
  • A detailed marketing strategy that outlines how you’ll continue to grow.

The more detailed your business plan is the better. It also prevents some of the time-consuming back and forth that generally happens when there are still unanswered questions in play.

2. Use for the Loan

Very few lenders – perhaps with the exception of some hard money lenders – are going to lend you money if they don’t know where it’s going. Simply telling a bank you need $100,000 isn’t going to fly. Even saying you need $100,000 for inventory isn’t enough. They want to know exactly what inventory you’re investing in, who you’re purchasing from, where the inventory will be stored, what sort of sales numbers you expect, etc.

You stand very little chance of successfully procuring a small business loan if you don’t clearly and thoroughly explain the “game plan.” A lender can always come back and say they want you to do something differently, but a lack of information will almost always result in a denied loan application.

3. Creditworthiness

While it might not matter to a hard money lender, creditworthiness does have a significant bearing in most small business lending situations. If you have poor credit, then you’ll need to start raising your score in order to open up your options. There are a number of things you can do, but it all starts with being responsible.

“Paying on time is one of the key building blocks of establishing creditworthiness,” business credit expert Marco Carbajo explains. “It builds good relationships between you and your suppliers resulting in better terms and stronger purchasing power. Payment history accounts for 35% of your FICO scores and is a contributing factor in the makeup of your business credit ratings.”

It’s also a good idea to stop co-mingling personal and business finances, if you have the tendency to do so. This scares away lenders and makes you appear disorganized and risky.

Safe and responsible are the two words you want your small business to epitomize when pursuing loans. If your credit score reflects these characteristics, then your chances of getting a competitive loan skyrocket.

4. Collateral

Now we come to the meat of the issue: collateral. Every type of lender considers collateral when evaluating a loan application, but to a hard money lender, collateral is everything. If you don’t have the collateral to back up a loan, then you’re going to struggle to get much of an offer.

In most cases, you’ll need to provide detailed collateral documentation. This includes independent assessments of value and proper papers that prove ownership. Collateral is essentially anything that you’re okay with losing should you be unable to repay the lender in cash. This could include real estate, inventory, equipment, or anything else that has value.

You’re also able to mark things off limits. If there’s something you aren’t willing to offer up as collateral, that’s fine. As long as you have enough collateral to cover the debt, you can safeguard assets.

5. Owner History and Experience

The last major consideration is your history and business experience. This can be somewhat of a subjective measurement, but does come into play. Have you proven an ability to successfully run a business, or is your past littered with poor decisions and failures? Most lenders will also want to know how much of your own money you have in the business. (If you’re asking for a $200,000 loan and only have $5,000 of your own money in it, something doesn’t look right.)

If you don’t quite have the history and experience that you think lenders are looking for, you may be able to overcome a deficiency in this area by having a loan guarantor sign on.

“A family member with a solid personal financial statement and an excellent credit history might be a prospect to personally guarantee the loan and strengthen the loan application,” says Bruce Hurta, an expert in the field of small business lending. “This could be because they are older, wiser, more experienced, and/or have just had the chance to accumulate more personal wealth.”

Do Your Due Diligence

Just because you’re offered a loan product, doesn’t mean you have to accept it. It’s an offer, nothing more and nothing less. Once you get all of your offers together, you have to sit down and evaluate your options. (Even if you only have one loan offer, there’s always the option of denying it.) Just as these lenders did their due diligence on you, you also have to spend some time evaluating.

Which loan offers you the lowest rate? Which loan has the best repayment terms? Do you really need that much money? The more questions you ask yourself, the better you’ll be able to determine which loan makes the most sense. 

Local Unit Lead for NAACP in Northern California with a mission is to ensure the political, educational, social, and economic equality of rights of all persons and to eliminate race-based discrimination. I enjoy writing and interviewing people making a difference in the World. Former Assistant Editor NY Times. NYU Alum living in sunny California.

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