Step 1: Review Credit
Pull and review your credit report from all three credit reporting agencies (Transunion, Experian, and Equifax). It’s free at AnnualCreditReport.com, but in order to get your FICO score you’ll have to pay a small fee. First, determine if there are any errors and get them fixed promptly. It’s important to take care of any bad debt, like collection debt, immediately. If you paid the debt, but it’s still on your report as unpaid, dispute it to get it removed.
The higher your credit score the better. If you’re already in the 700 range, you’re doing great. On the other hand, if your score is hovering around 650 or less, you may want to hold off a little longer on applying for a loan and work on increasing your credit score by paying off debt and making on-time payments.
Step 2: Write a Business Plan
It’s important to write a detailed business plan so it’s clear that you’re prepared and organized when you apply for a loan. Not to mention it will be a helpful guide to run your business. Keep in mind that your lender will want to know how you plan to use the money and, most importantly, that you have the ability to repay the loan. Be sure to include in your business plan:
- Executive Summary – describe your company
- Product / Service – what you are selling or providing
- Operations Plan – where and how will your business be run
- Marketing Strategy – how you plan to spread the word and grow your business
- Financial Projection – how you will be able to cover ongoing expenses along with your new loan payment
- Leadership Team – who is on your team, along with relevant experience/knowledge
- SWOT – an analysis of the strengths, weaknesses, opportunities, and threats of your business
For more tips to write a business plan, visit the Small Business Administration website.
Step 3: Determine Your Funding Need
Do your best to calculate what it’s going to cost to launch your company. Ask yourself the following questions:
- Do you need to rent office space or purchase equipment and supplies?
- How much will it cost to provide your service?
- Do you need to hire staff and if so, what will their compensation be?
- What is the cost of necessary licenses/permits, insurance, and legal help?
- Where/how will you advertise and how much is it?
Step 4: Do Loan Eligibility Research
Typically loan eligibility is based on: the size of the business; how the business will earn its income; where it operates; ability to repay the loan; and whether or not the business has a sound purpose. Credit is usually a major factor so be sure that you continue to make on-time payments on any debt obligations. It’s best, however, to contact local financial institution(s) to find out what their minimum requirements are. There is also the option of going through an online lender. Regardless what option you choose, be sure to shop around and compare prices.
You may also have to provide collateral, such as real estate or equipment, to back the loan. Essentially, these assets could be sold for cash if the borrower can’t make loan payments. If collateral is not an option or you don’t want to risk losing your assets, stick with an unsecured loan.
Step 5: Gather Documentation
As with any loan, you’ll need to provide relevant documentation, including:
- Proof of identity – Driver’s license
- Income Info – income statement/balance sheet, tax returns, bank statements
- Business Related Docs – Business plan, income projections, licenses, lease, etc.
If you’d like more help sorting through your finances and coming up with a plan for your business expenses, we have certified financial counselors available to help here.
Author Elaina Johannessen is a Program Director with LSS Financial Counseling and she writes for LSS’s personal finance blog, Sense and Centsibility.