Historic downtown Southern Pines, NC. Painting by Jane Tercheria.

My friend and business partner Kathleen and I are starting up a baby and maternity store. Getting a small business loan has been a ridiculously long process—it’s been over a year since we began—but what I’d like to share with you today is how the process generally works, and things you can do to make yourself more attractive to banks so that they’ll actually want to lend you money.

Banks lend money through the Small Business Administration

Every bank will be different but one thing is universal—banks don’t actually loan to start-up businesses. Instead, they enlist the Small Business Administration, a branch of the federal government, to guarantee the loan. This means that your bank will follow not only their criteria when choosing companies—maybe yours!—to invest in, but also the SBA’s!

We strategically use credit card companies that offer us our credit scores for free and without penalty.

Our first step was to contact the commercial lender of our choice. We had already become pals with a commercial loan officer named Greg when we took some free business seminars through our community college. He was one of the six local professionals that volunteered to speak at the seminars to get entrepreneurs like us on the right track.
Greg is everything we could ask for. He understands exactly who we are—two women experienced in retail—and the importance of what we’re doing: filling a really empty niche—maternity clothing—in our community. Our business is high-end boutique baby and maternity goods in a city with an ever-growing population and no competition! Pregnant women and gift-givers have only a few choices for children’s items in our county and not a single option for the pregnant woman, herself! We had a great idea and a great plan and we knew it.

Well, that’s only half the battle. Greg set us up on the right track for the lending process. Each of us on the bank note had to be aligned—a credit score of at least 660, a healthy debt-to-income ratio, and ideally, no revolving credit card debt with available credit.

Some debt is okay

We have student loans, mortgages and car payments. That doesn’t ruin our chances at getting a loan, but adequately managing this debt is important. This means NEVER MISSING A PAYMENT or sending in a payment late. Both of those things can stay on your credit report for two years! Greg taught us to, at the very least, always pay our minimum payments by the due date. Ideally though, he encouraged us to add a little extra to each payment, or even pay each bill double, to get the debt down faster and save big time on interest. To get out of debt, he advised attacking one credit card/debt at a time to knock it out fast while keeping up-to-date on all the others. One by one, they disappeared! This process took us about eight months from beginning to end.

Banks like to see a well-balanced financial statement

So now we have our manageable expenses and a credit card (or even a few) with a clean record of on-time payments and eventually, zero balances. He taught us to live in such a way that every card is paid off in full and that any charges made are paid off that same month. This also means you’re paying zero interest and finances charges! Win, win, right? Something else to consider is TO NEVER CLOSE YOUR CREDIT ACCOUNT EVEN IF YOU HAVE NO INTENTION OF EVER USING THE CARD AGAIN, because when you do, all of that good credit history you built up vanishes without a trace. All that hard work, wasted! Now wouldn’t that be sad?

Once we got comfortable with this, we each picked a credit card that had reward programs we liked. Now, each month, we personally—and our business, through the business credit card—MAKE money rather than losing money through finance charges and interest.

Pro tip: For tax purposes, pick a business credit card that offers points and discounts on travel, etc.—not cash. We did this because cash rewards are considered income and would be taxed as such within the business.

Check out your credit score

The US Federal Government allows each individual access to their credit report free of charge, annually. We use this credit report service every four months and request free reports from each of the three main credit reporting agencies. I save these files so I can remember which one I’ve pulled and when I pulled them, so each year I can pull that info again at the right time. These reports don’t contain your actual credit score number but do have all of your credit history. We use these as a tool to gauge our personal and business financial health.

A huge part of applying for a business loan is all about your actual CREDIT SCORE. To track that, we signed up with Experian so we could pull our actual average credit score numbers. We chose to do this every two months as pulling a credit score lowers it by 10 or 15 points—a dangerous thing when you’re trying to raise it!

Now that we are past the approval stage, we strategically use credit card companies that offer us our credit scores for free and without penalty. Discover is advertising their free Fico credit scores heavily right now, but plenty of other cards have always offered it to their customers, like Barclays and Capital One, both of which I have.

Once we got ourselves in a healthy financial state, we said goodbye to Greg and moved to another type of loan officer. We worked with Serena for a while until we were ready to work with the underwriter, the person at the lending office who actually approves and agrees to the terms of the loan. Serena was an invaluable resource. While Greg helped us attack debt and the health of the financial statement in a general capacity, Serena was someone we could get very detailed with—she helped us strategize based on our personal financial strengths and weaknesses.

Timing is everything: Get your retail space lease and loan guarantee together at the right moment

While we were plugging away at all of this, we set to work to acquire a lease for a retail space. One requirement of the SBA business loan is having a lease agreement for at least the length of the life of the bank note. This means that if we took a five-year note from the bank, our lease needed to also be at least five years. This requirement insures the safety of our new business and helps protect it from relocation woes while we’re trying to pay back a hefty loan.

This is where the juggling comes in! We didn’t want to sign a lease until we had a guarantee of a loan but we couldn’t get the guarantee of a loan until we had a lease lined up! This is a delicate dance that requires a great (and patient) commercial real estate agent and the right landlord. We lucked out, again, and after about six months of searching high and low, we found the perfect retail spot with a landlord who was willing to work with us. She let us issue a deposit and take a copy of a blank lease to our lawyer and to the bank. This proved (without the actual signing of the lease) that we had intent and permission to rent the space and allowed the bank to move forward in their underwriting.

One last tip

If you feel like you need help prioritizing all these important financial tasks, reach out to a professional who can help you come up with a plan. CPAs and bank employees should be excited to help you—their customer—manage your money!