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After you establish your business foundation, as described in Part 1 of this series, create your credit base as I explain in Part 2, open and use accounts as I lay out in Part 3 and Part 4 , your thriving business should be close to a year old. And you should be ready to apply for a small business loan. If you need a loan to start your business, I’ll explain what’s required.
When you’ve built an excellent credit history and your business is profitable, it’s much easier to qualify for a business loan. However, if your personal credit is trashed, your options will be limited. You’ll need two years of profits with CPA certified financial records from your business to qualify for a traditional business bank loan without a personal guarantee.
These are the five basic requirements to qualify for a bank’s business loan, including Small Business Administration (SBA) loans:
- Your personal FICO credit scores must to be 680 or higher. These scores from Fair Isaac Co. are the most widely used across all industries. If you’re tempted to check your credit scores online, be sure the sales pitch states, specifically, that you’ll receive your FICO scores. There are several FAKO scores on the market. Some use algorithms that calculate scores close to your FICO scores, and some are unreliable for determining your real FICO score.
- You need a believable business plan with realistic Cash Flow and Profit & Loss statements looking forward for two years. Tim Berry offers practical approaches to business plans with easy-to-use software. And Denise O’Berry provides helpful cash flow advice.
- You must have assets (real estate, retirement accounts, stocks, cash, other valuables) equivalent to, or greater than, the amount of money you borrow.
- The bank will expect you to contribute 25 percent, or more, for start-up costs. This can be money you’ve already invested in your business. The money cannot be borrowed. Keep impeccable records so you can easily show proof of your investment.
- You need a minimum of one to two years of experience doing the same work your business will pursue. If your company is a year old and doing well, that will be your expertise proof.
Banks want to see how you’re going to grow your business and repay your loan. You will probably be asked to provide records of assets you’ll use as collateral to secure a loan.
When you interviewed bankers to open your business accounts, you found the perfect bank or credit union for your needs. You’ve taken the time to develop a positive relationship with the officer who handles small business loans. He or she should be happy to provide guidance as you prepare your loan application.
A friend started a candy-making business early in 2009. She took all the appropriate steps to build a solid business foundation. Her personal credit is superior and she established excellent business credit during her successful first year. She hired a savvy accountant, who took every deduction she qualified for, which reduced her business taxes substantially. Then she applied for a small loan to cover some expansion plans this spring. Her banker had become a friend. She was not worried about qualifying for the loan. However, her accountant told the bank she barely broke even for the year. That squelched her loan. Think about all of your requirements when you hire an accountant. Be certain there’s expertise preparing financials for lenders, to maximize your opportunities.
The better the quality of your loan package, the higher your chances of qualifying for a loan. It’s important to take the time required to develop a comprehensive business plan and to convey your passion for your business through your loan package. If you’re turned down, you need to find out why so you can rectify the situation. And if your loan is approved, you want to be diligent about repaying it on time or earlier each month. You want to continue to raise your Paydex score.
Does your start-up need a loan to launch? Through banks and credit unions you’ll need to conform to the five bullets above. In addition, you’ll need to guarantee the loan. However, sometimes there are unique loans available to groups of people, such as women, minorities, and veterans in your city, county, or state. Cities with Empowerment Zones and regions with Rural Empowerment Programs sometimes offer funding for companies that locate there. Search for special loans you qualify for before you give up.
If you live in a city where Accion offers services, you will want to get to know them. Accion offers loans up to $50,000 and training programs for entrepreneurs nationwide. You can apply online or in person at one of their affiliate offices. They allow credit scores as low as 575, and they function more as a micro-lender than a banker. Accion can offer much individual assistance to a new entrepreneur.
And be sure to contact your local SCORE office to ask what services they can provide for you. SCORE is a nationwide organization that offers free small business planning and advice from volunteers who have been executives. Their purpose is to help small companies succeed.
Building a stellar credit history for your business can be executed with ease by following the steps provided in the five parts of this series.