As busy small business owners, we don’t celebrate milestones enough. While the world may not know about the important steps you took before officially launching your business, you know the many joys and struggles that preceded the “start” of your company.
Financing works the same way. Getting the first small business loan disbursement in your bank account may seem like the only milestone worth celebrating, but mastering the application process is itself a significant victory. And, just like becoming profitable has a lot to do with that pre-launch work, getting good terms on a small business loan has a lot to do with how well you’ve prepared to apply.
The process of preparing for a small business loan starts even before we become business owners. Lenders care about your personal credit score. How you handle a car loan or credit card debt now reflects how you might manage a $100,000 small business loan in the future. If you hope to get a small business loan one day, the very first thing to do is analyze your credit now. You can boost your score by disputing errors on your credit report (they’re more common than you might think!), keeping your outstanding balance low, and keeping your utilization rate (the percentage of available credit you’re using) under 10%.
Your business credit score is, of course, also important to lenders. If you haven’t separated your business and personal finances, do so ASAP. (It’s a headache at first, but we promise you’ll thank us later.) Then apply the same principles to your business credit that you used to analyze your personal credit.
Once your credit score is taken care of, it’s time to analyze your use case. Small business loans are meant to meet very specific needs. A good lender will not give you a loan for a financing need better met by credit cards or angel investors. Nor do they want to see your business squashed under the weight of an oversize loan. That’s why they study your financial statements and calculate your debt service coverage ratio, or DSCR. If you do this same process with a help of an accountant before applying, you can make a very compelling case for why you need the amount you’re requesting and why you can be trusted to pay it back. All the lender will have to do is double-check your math and send you the offer!
Your journey isn’t over when you get that first small business loan offer. Make sure you understand it! Understanding of the difference between interest rates and APR will make you a true master of small business loans. With that knowledge in hand, you can compare offers and understand exactly how much a loan is going to cost you by the time you’ve paid it off. Don’t accept a loan just because it’s been offered. You’re in charge of your business finances. By understanding what’s best for your small business, you can partner with people who will really help you succeed—and celebrate each milestone along the way.
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