Woman explains small business loan contract to customers.

Securing a small business loan in a credit crunch

Friday, June 09, 2023

Let’s say Sally owns a local brewery. She’s been waiting for the right time to add a taproom to her location, and the stars have finally aligned.

She hastily gathers up her financial information and visits her bank to apply for a small business loan. She’s been in business a few years and her financials are pretty solid, so her hopes are high. Despite the seemingly sunny outlook, Sally’s loan application gets denied. Disheartened, she assumes she’ll have to put off her dreams of opening that taproom another year or two.

Wondering why someone like Sally might get denied? Following the recent collapse of Silicon Valley Bank and Signature Bank, paired with rising interest rates, signs are showing that a credit crunch might be on the horizon.

If this is the first you’re hearing of it, a credit crunch is when financial institutions tighten their purse strings and credit becomes more difficult — and expensive — to get.

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According to a lending index from February 2023, big bank approval rates for small business loan requests have fallen nine months in a row, now at 14.2%, while small banks granted only about 20% of loan applications.

Whether you’re starting to feel the squeeze or you’re just concerned about the prospect of tightened lending, we have two pieces of good news:

  • First, experts are still split on whether the credit crunch is really here.

  • Second, even if the credit crunch does come to pass, that doesn’t mean you have to put your dreams on hold.

Before you press pause on launching that new product line or expanding to a second location, check out these tips on how to secure a small business loan when money is tight — and get better terms when it’s not. (Plus, discover a lending solution that could make the whole process easier than you think!)

Looking for a deeper dive into the ins and outs of small business lending? Download our ebook, How to get a small business loan: the entrepreneur’s handbook.

In this article, we’ll cover how to:

How to get a small business loan in 3 steps

We know securing a small business loan can be a complicated process. That’s why we made this three-step checklist to help you skip the guesswork and set yourself up for success no matter how challenging the economic climate. Let’s jump in.

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1. Get your ducks in a row

We won’t sugarcoat it, there’s a good amount of legwork that goes into the front end of your loan-seeking journey. But if you want to win over a lender in a credit crunch, it can’t be skipped.

Improve your personal and business credit score

For many types of loans, the loan amount and interest rate you qualify for largely depend on your creditworthiness — for both your personal and business credit history. Lenders want to get a sense of your fiscal responsibility and a feel for how likely you are to pay back a loan on time as an individual and a business.

The first thing you’ll want to do is check your personal credit score and business credit score. If the scores you see aren’t what you were hoping for, don’t worry. You can take steps to improve bad credit.

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Check out this guide on how to build business credit to get started. If you need a loan now and don’t have time to bolster your score, there are plenty of lenders who don’t put as much emphasis on credit history.

Improve cash flow where possible

After you’ve gotten your credit score in order, you’ll want to focus on cash flow. The goal is to achieve a positive cash flow to show lenders you’re making more money than you’re spending.

Here are a few tips to get to positive cash flow:

  • Establish a firm policy for customers around payments, credit and collections

  • Go paperless with eBilling and invoicing

  • Pay bills you owe on time but avoid paying early

  • Use your point of sale system to prevent overbuying inventory

  • Use retail analytics to increase sales and implement strategic discounts

  • Use payroll and HR tech to stay ahead of overtime costs, cut back on time theft and take advantage of tax credits like WOTC

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Bottom line? Positive cash flow sends a signal that you’re a good investment and have the money to pay upfront costs — and make timely payments down the road. Check out our in-depth guide on how to improve your business’ cash flow to learn more.

Build your business plan

Next, it’s time to build your business plan. This is slightly different from the kind of business plan you’d write when you’re just getting your business started, but you can definitely pull from that plan to create this one.

Your plan should do three key things:

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Explain why you need the loan

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Outline how you plan to use it

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Demonstrate how you will pay it back

Think of your business plan as your main argument for why they should give you the loan. Be sure to illustrate what success looks like in your plan. If you can show the lender you’ve achieved your goal using the loan, they’ll be more likely to reinvest in your business in the future.

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Want more tips on writing a business plan? Explore our interactive plan-building tool for additional pointers and ideas.

Determine the value of your collateral

Wondering what we mean exactly when we say “collateral”? It’s when you give the lender a valuable asset as security for the repayment of a loan. As a small business, collateral could look like equipment, real estate, accounts receivable or inventory.

If your lender requires collateral, your first step is to assess all your potential personal and business assets. Next, get estimates from multiple sources before you settle on a value. From there, stay on top of quality control to make sure the value of your collateral doesn’t deteriorate. For example, if you pledged accounts receivable and customers aren’t paying on time, what policies can you enforce to close that gap?

Keep in mind: In the event of a default, your collateral is forfeited. Decide what you’re willing to pledge accordingly.

Get your legal documents and financial statements in order

In addition to collateral, lenders might ask for the following:

  • Monthly bank account balance sheets

  • Income or cash flow statements

  • Annual revenue documentation

  • Profit and loss statements

  • Tax returns for the business and business owner

They also may ask for copies of:

  • Business licenses

  • Registrations

  • Articles of incorporation

  • Third-party contracts

  • Franchise agreements

  • Commercial leases

  • Business owner social security number

  • Business owner driver’s license

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We know … it’s a lot. Our perspective? Do your best to stay organized. Securely saving digital records of important business documents can help you avoid a goose chase for that random piece of paper you accidentally hid from yourself years ago.

Man researches different small business loan types and rates

2. Do your homework

Now that you’ve got your house in order, it’s time to set your sights on where to cast your net.

Determine what type of loan you need

Loans come in all shapes and sizes, so it’s important to do your research. Check out our ebook at the end of this article to learn more about the different types of business loans and determine which one is the best fit for your business needs. If you’re having a hard time narrowing it down, ask yourself these questions:

  • What do I need this money for?

  • What size loan do I need?

  • When do I need it by?

  • What loan terms can I realistically meet?

  • How is my credit history?

After you make your pick, research all the requirements for that specific loan type. Make a list, then check it twice. Seriously. Lenders in the midst of a credit crunch will probably be less forgiving if you fail to meet a requirement. Being on your “A” game will help your cause.

Shop around for the best rates

Even if the pickings feel slim, it’s still worth it to avoid swinging on the first pitch.

Once you know what loan you’re looking for, you’ll want to research the right lenders for that loan type — in your area and online. You can get a loan from banks, online lenders, nonprofit microlenders and more. So be sure to shop around. Here are a few tips:

  • Give yourself time to do your research

  • Compare lending terms and interest rates

  • Look for qualification requirements that suit your situation best

  • Research the severity of lender policies for missed payments or defaults

One more piece of advice: If you get a rejection after reaching out to a lender, don’t get discouraged. The next lender might have a different answer for you.

Man meets with lender to apply for a small business loan

3. Make your case

At this point, you’ve gathered your application info, selected your loan type and chosen your lender. Now, it’s time to apply.

Sell your story and vision — like never before

Stories have power. Your story has power.

So, when you’re standing in front of that lender, don’t miss the chance to tell them yours. Here are some questions to help get your wheels turning:

  • What makes the business idea you need a loan for unique?

  • What does it bring to your community?

  • What problems does it solve for customers?

  • What did you have to overcome to get your business to today?

  • How has your business grown or changed over time?

  • If you’ve had a falloff, why is that and how are you handling it?

  • How have you responded to recessionary pressures?

  • What’s your long-term mission?

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The takeaway? A lender wants to know who you are — or to put it more bluntly — who they’re trusting their money with. So, tell a unique story that ultimately shows lenders you and your business are a responsible investment and primed for growth. Just be sure to back it up with hard numbers and use data throughout.

Share your financials

No matter how awesome your story is, if you can’t follow it up with the necessary financial information, your lender won’t bite.

If you’ve been in business a while, be sure to provide all the financial information we went over earlier — and be ready to tell a story about it. Even if there are parts of your finances that don’t look so good, don’t panic. A lender wants to know how you bounce back from setbacks.

If you’re applying for a loan to start a new business venture, make sure your financial story has these two elements: vision and strategy. Describe your vision in terms of the revenue, traffic and new customers you plan to get each month for the next few years if you were to get the loan. Then, back up your vision with a multi-step strategy for how you plan to make it happen.

Ultimately, applying for a loan is telling a story about your finances. If you want to win over a lender in a credit crunch, telling a strong one can go a long way.

Ask questions

Remember: A loan is a relationship that goes both ways. As much as you might want that money, you also don’t want to get into a relationship with a bad partner.

To feel out if a lender is going to be a good partner, ask the following questions:

  • How long is the application process and what does it entail?

  • What are the full terms of the loan?

  • What are the repayment terms?

  • Are they public?

  • What’s their portfolio like?

  • Do they lend to businesses in your industry?

  • Is their loan portfolio growing?

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Word to the wise — pay attention not only to what the lender tells you but also to what their customers say about them. We live in the age of online reviews, so take advantage of all the information at your disposal to make the best decision.

Ready to get your small business loan the easy way?

If you’re still with us, congratulations! You’re ready to get a small business loan in a credit crunch and make your dreams happen — without the wait.

But we have a question for you: All that sounded like a lot of work, right?

What if we told you that you could send just one loan application and it would automatically canvas the lending marketplace to get you the most competitive loan options, rates and terms possible?

Meet Heartland Capital, powered by Lendio: The guided lending experience that allows you to skip the work and get the cash you need — fast. Here are just a few of the great things about it:

  • Offers loans up to $5M

  • Provides access to a line of credit up to $250K

  • Canvases 80+ banks, credit unions and alternative lenders

  • Compares 10+ funding option types

  • Easy, online application process — no commitments, fees or obligations

  • Competitive loan options, rates and terms

  • Quick funding approval with 24 hour turnaround time

Here’s how it works: You’ll apply for a loan directly through the Heartland Capital website, receive an email with your offers, work with a dedicated lending advisor to review your loan options and find the best one, accept your top choice via electronic loan documents and get your money in 24 hours. From application to approval, the whole process takes about one week.

Yep, it’s really that easy — and it’s free. You only pay once you officially select an offer.

Ready to put your dreams in motion? No need to wait. You can apply for a loan in as little as 15 minutes. If you have any questions, don’t hesitate to contact us.

The entrepreneur’s handbook for small business loans

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Disclaimer: The information provided in this document does not, and is not intended to constitute legal advice; instead, all information, content, and materials available are for general informational purposes only. Information provided may not constitute the most up-to-date legal or other information, and readers of this information should contact their attorney to obtain advice with respect to any particular legal matter, in the relevant jurisdiction. All liability with respect to actions taken or not taken based on the contents here are hereby expressly disclaimed.

Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us