What To Do Before Applying For A Small Business Loan

Finding the money to start your practice is a hurdle you may have to overcome.  For many it’s the biggest obstacle standing in the way.

But it doesn’t end there. Even once established, it might be challenging to find the money to purchase equipment or grow your business.

Perhaps you want to expand your practice and need additional medical equipment. Or you simply need new office equipment to stay current with technology.

Whatever it may be, the challenge is finding the money to make those bigger purchases. And of course, you want to get the best terms possible when taking out a loan.

Before taking on any debt, it’s good practice to ask yourself if you should finance it yourself. You might consider dipping into personal savings or using a credit card for the purchase.

If you’re considering starting your own practice the question to ask yourself is: “Should I bootstrap my practice or should I take on outside debt to get started?”

So what is bootstrapping?

Bootstrapping simply means that you finance your practice by using your existing resources… puling yourself up by your own bootstraps. Bootstrapping also implies that you limit your expenses to the absolute minimum necessary while getting started with your practice.

Bootstrapping is a strategy most often utilized by small businesses because they have greater difficulty getting funding to get started. So rather than waiting until they can secure financing, they creatively pull their own resources together and start their business on a shoestring.

Of course, should you bootstrap or take on “bank debt” is closely tied to how much money you need to get started with your practice. This is one area where planning for your practice will pay off big.

If you decide to take on formal debt and need to apply for a business loan, there are a few things to consider before you fill out the paper work and sign on the dotted line.

Think ahead and be proactive.

Thinking ahead and being proactive is to your benefit. It will put the odds of getting approved for the loan on your side.

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Below are a number of things to consider prior to applying for a loan.

  1. Consider starting part time and keeping your job. Lenders like to see a secondary source of income, ideally one that is capable of repaying the loan. If your only source of income is going to be your practice for which you are seeking the loan, it may be a tough sell. Consider staying with your employer at least until you have secured the loan. Perhaps you can start your practice on a part-time basis initially, get everything set up, and then quit your job.
  1. Identify any collateral. If you own significant assets, be prepared to have liens placed against them. The bright side is, if you have assets, it most likely will be easier to get a loan. Lenders can use your assets to recover the loan in the event of default. If you have no or few assets it might be more challenging to secure a loan. To compensate for the lack of collateral lenders will give additional weight to other parts of the loan application. This may include your credit history, your other financial obligations, the business plan… just to name a few.
  1. Be prepared to backup you application with proper records. Depending on the amount of loan you’re asking for, you may be required to include a lot of supporting documentation. Be prepared by having hard copies of everything ready to go. At minimum this will include income tax information, pay stubs from your current job, verification of assets, and more.
  2. Have your business plan ready… having a solid business plan helps to put the lender’s mind at ease. Include all the information related to how the business will operate, the people involved in the running of the business, their experience, and reasonable income projections.Keep in mind that lenders see business plans every day. Make sure your income and expense projections are reasonable. If they’re not, lenders will see through it and your credibility will suffer.
  1. Ask for money before you need. Ironically it’s often much harder to get a loan when you really need the money. And, when you’re in a tight spot, you won’t have the time to shop around for the best loan and interest rate. My recommendation is to secure a line of credit you can use repeatedly for bigger purchases or help you get through tight spots in your business. As soon as your practice is up and running and you can show consistent income, start shopping for a line of credit with good terms. The key is to secure a line of credit before you need it.
  1. Know the condition of your personal credit. Your credit history is a very important part of the loan application process. Be aware of everything in your credit report, both the good and the bad. If there are any mistakes to your detriment, have them corrected before filling out the loan application. In addition, do everything you can to repair negative information.
  1. Anticipate any potential questions the lender might have about your application. Be prepared to answer any questions and address any problems proactively. If for example, you’re credit report shows a number of late payments, be prepared to explain to the lender why it happened.

So here’s what to do next…

If you are considering applying for a loan, go through the list of considerations and address each and every one. Specifically:

  • Make a list of all the assets you own.
  • Order a current credit report and make corrections if needed.
  • Identify any potential problems the lender might ask about.
  • Be clear on how much money you need and what you need it for.

Of course, all of this will take some time to do. However, it will be worth all the time and effort you’ll put it. Going through this process will prepare you for all the questions and problems that may come up when applying for a loan.

Following the above advice won’t guarantee that your application will be approved. However, it most certainly will increase your odds of success.

 

By Johanna Hofmann, MBA, author of “Smart Business Planning for Clinicians” and regular contributor to the NPBusiness blog.

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