Make Your Own Luck: How to Prepare for a Small Business Loan

As I’ve worked with entrepreneurs all over the country, I’ve always suggested that “luck is where opportunity and openness collide.” We all know that one person on whom good fortune seems to shine, but I don’t think it boils down to luck. It stems from a willingness to curiously explore opportunities and being primed to take action when the time is right.

 Suppose a golden business concept presents itself, and you pull together reasonable financing to take advantage of it. Should you consider yourself lucky? In leveraging one of these so-called ‘lucky breaks’ effectively, you’ve actually demonstrated what I consider a hallmark of successful entrepreneurs: preparedness.

If there’s one aspect of business you should never leave to luck, it’s financing. By being prepared early on, you’ll not only have better chances of approval with preferable rates, but you’ll be able to cash in on those once-in-a-lifetime opportunities when they come along. Indeed, business owners exert a great measure of control over three critical factors when it comes to getting approved for funding: their business plan, credit scores and down payment.

If business ownership is in your future, here’s a breakdown of what I suggest to help you prepare for obtaining a small business loan, particularly those from the Small Business Administration (SBA).

Write a Smart Business Plan

While all these moving parts might appear intimidating, investing time in developing your business plan can open many doors going forward, and you can always seek professional advice to turn one of the biggest hurdles in applying for funding into your strongest asset.

Crucial factors to keep in mind:

• Demonstrate your experience: Lenders want to see that you know your industry and possess a proven track record of handling profits and losses. If you don’t have this requisite experience, start strategizing ways to get it.
• Show your market knowledge: Research your industry thoroughly, and illustrate concretely how you’re going to reach your target market and differentiate yourself from competition.
• Prove your financial viability: In your funding request and financial projections, demonstrate that you understand your company’s cash needs and set reasonable expectations. I’ve seen many entrepreneurs set their projections too low and end up stranded when they run out of capital. Be realistic in your forecasts, but don’t sell your business short either.
• Add professional polish: This isn’t to advocate style over substance; however, professional presentation in both format and content speaks volumes about your approach to business. Simply writing in the third person (“the company” rather than “I” or “we”) and supporting your analyses with visual aids adds formality and shows you’re thinking like a big company, even if you’re a small enterprise.
• End with the beginning: Write the executive summary only after you’ve put together the rest of the plan. Distill your plan down to its essence in your summary to give lenders a powerful first impression.

For more on writing business plans, read my article on four considerations of a bank-friendly plan. The SBA also provides a concise overview of business plans, and you’ll find plenty of free sample business plans online, too.

Know (Both) Your Credit Scores

In the numerical soup of credit ratings, people mostly know about personal FICO scores. Most SBA lenders currently look for personal scores above 680. However, there’s another SBA credit score requirement you may not be familiar with: FICO’s Small Business Scoring Service (SBSS). While there is significant correlation to your personal credit score, an SBSS score also takes into account an existing business’ financial track record. SBSS scores range between 0 to 300, and SBA loans require a minimum SBSS score of 140 when applicable, though many lenders I work with prefer 160 and above.

Well before you apply for a small business loan, take the time to understand both of these credit scores and increase them where possible:

• Study your credit reports: Individuals can pull their credit report for free once a year (without impacting their score) from each of the three major credit reporting agencies — Equifax, Experian and TransUnion — through com, although you’ll have to pay $7.95 to see the actual FICO score. You can find an existing business’ SBSS score through services such as Nav.com. If you find mistakes, correct them immediately.
• Boost your credit strategically: Paying down debt doesn’t hurt, but it’s not a one-size-fits-all boost to credit. If you’re using a high percentage of your credit limit, you probably can improve your score quickly if you can afford to reduce debt. But missed payments and delinquencies stick around much longer on credit reports, and you might want to work with a reputable credit repair company. Keep in mind, though, that even the quickest fixes may take months to appear on credit reports.
• Set yourself up for future success: Take the effort out of paying bills by setting up automatic payments or payment reminders. Sometimes the best action is no action: don’t close out old, unused credit cards, because low credit utilization and a long history of good standing with a creditor also improves your credit.

Whether you prepare yourself with some simple steps or seek out advice from a FICO or a credit professional, it takes time to build strong credit. Yet if you can bide your time before applying for a loan, your patience may be well rewarded with a lower interest rate. 

Explore Your Savings Sources for a Down Payment

Lenders expect prospective borrowers to make a substantial equity injection for a business loan — 20 percent for an established business; 30 percent for start-ups — but you can’t use borrowed money such as a HELOC for that down payment. What other options do you have, aside from pillaging that jar where you toss your spare change?

You can certainly take the slow and steady path of reducing expenses and socking away amounts on a regular basis with automatic transfers. However, entrepreneurs can also prepare to make a down payment by carefully researching a number of sources, which include finding a business partner, cashing out an investment or exploring 401(k) business financing [formally called Rollovers for Business Start-Ups (ROBS)]. ROBS allow you to use retirement funds you already have to invest in a business without triggering a taxable distribution or taking a loan. Most plans qualify, from 401(k)s to traditional IRAs, and there’s the added benefit of meeting down payment requirements without raiding your personal savings.

What’s Luck Got to Do with It? 

Chance circumstances do play a role in business success, but fortune tends to smile on those who are best prepared. It’s no small task to put together a strong business plan and meet the criteria lenders are looking for, but the earlier you can start preparing, the better your position will be when you apply for funding — and the better your terms and conditions.

So when’s the best time to start? Right now. My company, Guidant Financial, offers a free tool that instantly reveals which business financing methods you currently qualify for, as well as your total funding amount. Get pre-qualified now.

For more entrepreneurial tips and tricks, visit the Guidant blog. 

Learn more about our small business financing services at guidantfinancial.com.