The #1 Thing You Must Do Before Asking for a Small Business Loan

Content provided by the Connecticut Small Business Development Center

Seeking funding for your business can be an arduous endeavor. Depending on your industry, your business development stage, or your personal financial history, obtaining a small business loan may be challenging. However, if you put in the work first before you meet with a lender, you can increase your odds of getting funded.

The number 1 thing a small business owner must do before asking for a small business loan is to create a compelling business case.

Your business case is presented in a loan package that must demonstrate:

  • Your ability to repay the loan.
  • Your history of meeting debt obligations.
  • The collateral you have to offer the lender.

Let’s look at each element in depth:

 

  1. Your ability to repay the loan.

The lender wants to make sure your business project will be able to pay back your loan. They’ll look at your team, industry, market, and competition to ensure your business concept or current operation is poised for success. They’ll also want to know how much money you need and how you will use it. They will expect a comprehensive budget with supporting evidence of costs and revenues. The Connecticut Small Business Development Center’s (CTSBDC) business advisors have tools to walk you through building your budget, including projecting your revenues and expenses and explaining the assumptions behind each.

 

  1. Your history of meeting debt obligations.

Similar to your ability to repay the loan, the lender wants to see demonstrated ability to pay off debt. They’ll look at your credit score, and your debt to equity ratio. Have a low credit score or no idea what a debt to equity is? The CTSBDC can help you find ways to increase your credit score or find alternative funding sources that are more amenable to lower credit scores. A business advisor will also work with you on your financial statements so you put your best foot forward at a bank.

 

  1. You have collateral to offer the lender.

Before creating a loan deal, the lender will want to make sure there is a backup plan in case you cannot make your loan repayments any longer. The lender will ask for collateral to secure to the loan. Potential collateral assets include: accounts receivable, inventory, furniture, fixtures, machinery, equipment, business and personal real estate and cash on hand. The lender will be asking: are there enough assets to secure the loan? Can the assets be liquidated to pay loan, if necessary? Are the assets of sufficient quality? Are assets audited/appraised? Are assets collateralized in any way?

 

As you may have noticed, the lender is looking to reduce their chances of you defaulting on your loan.  By focusing on creating a loan package with these three points in mind, you will position yourself for success. A business advisor at the Connecticut Small Business Development Center (CTSBDC) can work with you at no-cost to work through the process of making a compelling business case for your loan package. Register for professional business advising at CTsbdc.com to start working on making a good impression at the bank!