Securing financing for your small business is a pivotal step towards growth and success. However, you may find that commercial lenders tend to be cautious, only wanting the most secure investments. If you are meeting nothing but challenges when attempting to secure a small business loan, the best thing to do is learn how to instill confidence in lenders. In this article, we will introduce 7 essential tips for securing that much-needed small business loan.

1. Construct a Comprehensive Business Plan

Getting a business loan in New Jersey (or anywhere in the nation) is a bit like building a resume for a new job. In other words, you have to write out a comprehensive business plan that outlines your business’s goals and strategies. It should also delve in market research, competition analysis, and financial projections.

Your business plan is essential. Lenders want to see that you’ve done your homework, understand your industry, and have a clear path to profitability.

One indispensable piece of the business plan is the 12-month cash flow projection. This financial forecast should encompass best-case, likely, and worst-case scenarios, demonstrating your ability to foresee potential challenges and navigate through them, which reassures lenders.

Furthermore, your work resume or CV should be part of the package. It showcases your experience, skills, and competence, adding a layer of credibility to your loan application.

2. Strengthen Your Personal Credit

Your personal credit score carries substantial weight when searching for a loan. This is especially true when you are in the early stages of your business or when you have yet to establish business credit. When applying for a loan in NJ, lenders will examine your personal credit history when reviewing your application. In other words, if you are hoping to get an SBA loan or a term loan, your personal credit must be strong. For example, for a SBA Microloan, you need a minimum credit score between 620-640. For a 7(a) SBA loan, you need at least a 640. However, individuals with credit that is higher than 680 will have greater success.

To bolster your chances of approval, run a personal credit check beforehand. If your score is less than stellar, work diligently to improve it by paying bills promptly and in full. Credit usage—or the amount of credit you can tap into—also plays a role.

If there are red flags on your credit history, be prepared to explain them and detail the steps you’re taking to rectify any issues. If you have limited personal credit history, consider obtaining a credit card and using it responsibly to build your credit profile.

3. Present Your Business’s Current Situation

For existing businesses, it’s crucial to provide a comprehensive picture of your current situation. Think of it as a report card with key performance indicators (KPIs) from your business plan. This not only demonstrates that you’re executing your plan but also highlights your adaptability in making changes to improve results.

Moreover, present accurate and up-to-date financial statements, including balance sheets, income statements, and reports on accounts receivable and accounts payable. To ensure precision, consider having a bookkeeper or accountant prepare these statements for your presentation.

Most importantly, understand your finances inside out. Be prepared to discuss the results with potential lenders. It’s not just about presenting the numbers; it’s about showcasing your financial acumen and the ability to manage your business’s finances effectively.

4. Reduce Your Debt-to-Income Ratio

On both the business and personal sides, reducing your debt-to-income (DTI) ratio is crucial. This ratio is one of the most fundamental factors lenders consider. If your debt is too high compared to your income, lenders may view you as a higher risk, less likely to make loan payments consistently. Ideally, your debt-to-income ratio should be lower than 50%. A high DTI suggests that a significant portion of your income is already committed to debt payments, leaving less room for new financial obligations like a business loan. Lenders will be hesitant to approve your application in this case.

Here is an example of how your DTI ratio is figured. It’s calculated by dividing your total monthly debt payments by your monthly gross income. The result is expressed as a percentage. For example, if your total monthly debt payments amount to $2,000, and your monthly gross income is $6,000, your DTI ratio is 33.33%.

How to Improve Your DTI Ratio

Reducing your DTI ratio is a proactive step towards enhancing your financial health and boosting your loan approval prospects. Here are strategies to consider:

• Pay down existing debt. Start by tackling debts with the highest interest rates, such as credit card balances or personal loans. Paying down these debts aggressively can have a substantial impact on your DTI ratio.
• Increase your income. Look for opportunities to increase your business’s revenue, whether by expanding your customer base, launching new products or services, or optimizing your pricing strategy.
• Avoid new debt. It’s crucial to limit new debt commitments, as they can quickly raise your DTI ratio. Evaluate any potential new loans or credit lines carefully and consider how they may affect your overall financial picture.

5. Know Your Business Credit Score

Understanding your business’s credit score is paramount when seeking a small business loan. This score is a vital indicator of your business’s creditworthiness and can significantly influence a lender’s decision. Two key players in the business credit scoring arena are Dun & Bradstreet (D&B) and FICO SBSS (Small Business Scoring Service).

Dun & Bradstreet (D&B)

D&B is a prominent credit reporting agency that assigns a unique nine-digit D-U-N-S® Number to each business entity. This number serves as a digital fingerprint for your business, allowing lenders and creditors to track your credit history and financial stability. Your D&B PAYDEX credit report provides an in-depth view of your business’s credit activity, which lenders often rely on during their evaluation.

Your PAYDEX score will range from 0-100. Here is what the score means:

• 80-100: This range is considered excellent. It indicates that the business consistently pays its bills on time or early.
• 70-79: Scores in this range are good and suggest timely payments.
• 50-69: These scores are fair and indicate that payments are often made later than the agreed terms.
• 49 or below: A score in this range is poor and suggests a history of late or severely delinquent payments.

FICO SBSS (Small Business Scoring Service)

FICO SBSS is a specialized credit scoring model designed specifically for small businesses. It takes into account a range of data, including both personal and business credit information, as well as other financial factors, to generate a comprehensive credit score. The scores range from 0 to 300:

• 155-300: This range is typically considered excellent. Businesses with scores in this range have a strong credit profile and are more likely to secure favorable financing terms.
• 140-154: Scores in this range are good and indicate a lower level of risk to lenders.
• 125-139: These scores are fair and may require additional evaluation by lenders.
• 0-124: A score in this range is generally considered poor, and businesses with scores at the lower end may face challenges in securing financing.

Most loans, particularly SBA loans, will want you to have a minimum FICO score of 140.

6. Know The Lender’s Requirements Prior to Application

Each lender is going to have specific requirements for getting a loan in NJ or anywhere else. Knowing these requirements in advance will save you some valuable time and effort. Additionally, being well-prepared and aligning with the lender’s expectations can significantly enhance your loan application’s success.

Do some research on the lenders and look up their minimal requirements. You should also gather documents, including your business plan, financial statements, tax returns, and any legal documents pertaining to the structure of your business. Keep in mind that some lenders will also ask you for collateral to secure a business loan. A personal guarantee may also be necessary.

7. Prompt and Thorough Follow Up

The loan application process often involves multiple stages, with lenders requesting additional information as they assess your application. When they ask for more details, it’s essential to provide them promptly and comprehensively. Doing so demonstrates your organization skills and your commitment to meeting your commitments.

Transparency is key. If you encounter challenges or setbacks, be forthcoming and honest. Trying to hide negative results or downplay issues will not work in your favor. Lenders appreciate applicants who are forthright about their challenges and proactive in addressing them.

Looking to Get a Small Business Loan in NJ?

By following these seven essential tips, you can navigate the complex landscape of business financing with confidence. From tidying up your credit to crafting a rock-solid business plan, each tip contributes to your success in securing the funds you need to grow and prosper.

Remember, securing a small business loan isn’t just about meeting lender requirements; it’s about building a strong financial foundation for your business’s future. Your dedication, preparation, and commitment to excellence will set you on the path to achieving your business goals.

For expert guidance and tailored financing solutions, consider reaching out to New Bridge Merchant Capital. With over 20 years of experience in the financial industry, our team is committed to helping businesses like yours thrive. We understand that every business is unique, and we’ll work closely with you to provide the funding you need to succeed.

Contact New Bridge Merchant Capital today by calling 844-228-0593 or by filling out the contact form to explore customized financing options for your small business. Your success is our priority.