Small business owners often lack the credit, collateral or experience it takes to land a traditional small business loan. “In this climate, it’s much more difficult,” says Denise Beeson, a Santa Rosa, Calif.-based commercial lender specializing in Small Business Administration loans.
While it may take multiple applications—and rejections—until a loan is approved, don’t give up. You can raise your chances of securing funds by knowing your options and finessing your approach.
What are banks looking for?
Before looking to another lender, give your company a good, hard look. Beeson points to three factors banks may consider when making small business loans:
- Credit score – should be above 700. ?
- Your ability to repay the interest on a loan, in addition to repaying the loan itself.?
- Collateral – many banks these days want more than one source.
Alternative lending options
You’ll still need to demonstrate your ability to repay, but alternative lending sources tend to be more flexible than banks. Here are some options:
- Peer-to-peer lenders. Websites like Prosper.com and Lendingclub.com act as a matchmaker between businesses and people interested in funding them. Prospective borrowers fill out an online application, pay a fee and are rated according to risk. “You don’t normally see million-dollar requests, but for $25,000 or $30,000, it’s a great place to go,” Beeson says.?
- Niche lenders. Seek out lenders that loan to particular industries, like Kiva.org, an online service that partners with microfinance institutions to lend to nonprofits alleviating global poverty; or Eastern Funding, LLC, which makes loans to small owner-operated businesses in the coin-operated laundry, dry cleaning and grocery sectors.?
- Local options. Some states fund lending programs that focus on a given community, like The Loan Fund, a small business lender in New Mexico. Whereas banks have set debt-to-income ratios, credit scores and criteria like minimum number of years of profitability, The Loan Fund says it has more flexible underwriting criteria and is more willing to consider extenuating circumstances.
Improve your prospects
No matter the lender, here are five ways to boost your profile:
- Obtain your credit report from AnnualCreditReport.com, and follow tips from the Federal Trade Commission’s website to improve your score—like disputing negative information or adding accounts.
- Reengineer your business by getting rid of unprofitable products or services.
- Bundle products and services together. For example, Beeson says, a dry cleaner could add value to their customer base by offering an alteration service.
- Get free consulting from your local Small Business Development center or SCORE office. ?
- Write—or rewrite—a business plan. “It can be just a bulleted list of focus ideas for 2011,” says Beeson, but a plan will keep you focused and make you more attractive to lenders, as well.