One of the biggest hurdles to starting a small business is funding. Many people start their businesses with their own funds or with small loans from friends and family. If those funds aren’t available or you need more money than those sources can provide, a good option may be a small business loan.
What are small business loans?
The Small Business Administration guarantees loans to small businesses that banks make, which takes away some of the risks and helps small businesses get financing when they otherwise not be able to. Because of the guarantee, the SBA has lots of rules that you have to follow that make it fairly difficult to get approved for a loan.
Have a clear purpose
You must have a sound business purpose for the SBA to grant you a loan. Make sure you have a solid business plan and that your business meets all criteria for size, type of business, etc.
You need collateral
The SBA expects its loans to be fully secured by tangible assets, which usually means a business building and equipment, but can be personal property. If you don’t have sufficient collateral, you still may be able to get the loan, but it will be much tougher.
You must be able to repay it
The SBA will look long and hard at your ability to repay the loan. If you are an existing business, you will need to be able to show a solid history of profit as well as good cash flow. If you are a new business, you must have a solid business plan that shows your ability to make loan payments.
Have your information ready
The SBA will want to see a number of documents from you, including your personal and business credit scores, financial statements, your business plan, projections of cash flow and any personal guarantees by members of your business.
Acquiring funding is one of the most difficult hurdles a small business will face. Aspiring small business owners are often unaware of not only the availability of small business loans but of how the process for getting one works. Applying for these loans is a complicated and time consuming procedure. However, the small business owner can simplify the process by keeping a few things in mind.
Getting a business loan is as much about finding the right lending institution as it is about having a proper business plan. All banks do not use the same criteria when determining who will get a loan. While some banks may emphasize the business background of the owners, others may put more emphasis on a well-developed plan. Finding the right fit can be a long and discouraging process.
Personal History Matters
Small business owners are often caught off guard when they learn that their personal history may be one of the criteria for getting a loan. The credit history of each owner may be a major factor in determining the success of a loan application. Furthermore, lending institutions may look to the owners to provide personal collateral to help secure the loan.
Receiving a loan rejection is never easy. However, being rejected can provide a unique learning opportunity that a savvy applicant will take advantage of. It is important to remain calm and focused. Have an open and candid conversation with the bank about why the application was rejected. This direct feedback is one of the most effective ways to improve the application and increase the chances for future success.
Even though the government provides many programs and agencies to assist in getting small business loans, understanding and following the procedure can still seem daunting. It is important that the hopeful business owner becomes knowledgeable as early in the process as possible.
Determining whether or not a small business loan is right for you depends upon the type of business financing you need. Today’s lending environment requires you to know exactly how a small business loan works and your available options. For example, you may want to expand your businesses location or you may need to purchase or lease additional equipment. You must clearly define to the bank the purpose of the small business loan and explain why it is a good reason for you to go into debt with them.
Not every reason is a good reason to take on additional debt for your small business. However, plenty of good reasons do exist, and if you plan out those reasons correctly, it will only help your bottom line. Here are some strategic and smart reasons for a small business loan.
Buying Additional Inventory
Inventory is one of the biggest headaches for many small business owners. Many entrepreneurs struggle with either too much or too little inventory to meet supply and demand. However, by using proper cost projections and available inventory compared to your previous year’s sales, you can identify holes in your inventory today and fill those holes with a small business loan in order to see returns on your inventory (ROI).
New Business Opportunities
In the world of small business, opportunities come and go. However, when new opportunities do arise, they are sometimes too good to pass up. Entrepreneurs who face these opportunities may not have the equipment to complete a new project, or buy needed inventory at a large discount with a small window to act on the discount. When these new business opportunities arise, you must thoroughly analyze whether the return outweighs the new debt incurred by a small business loan. If you perform an accurate revenue forecast based on the purchase of the new equipment to complete the project, or the discounted inventory increases sales, then a small business loan may be right for your business.
If securing financing is an important step to establishing your start-up business or funding your existing company, you should be prepared before you begin. The best way to increase your chances of being approved for a small business loan is to be thorough and accurate with the information that you include with your application. Lenders are more likely to expedite the process to finalize your loan.
Create a Strong Business Plan
A clear business purpose combined with a solid plan of action can significantly help you secure the financing that you need. The lender’s primary goal is to ensure that you’re able to pay back the loan. They are looking for proof of your financial strengths and your projected flow of cash. When you demonstrate that you have the resources to abide by the terms of the loan agreement, many financial institutions will consider taking a chance on providing the investment to help you grow your business. If you own assets that can be used as collateral, this provides an extra level of security that banks need to minimize the risks of extending a business loan.
Research Potential Lenders
Before you begin applying for small business loans, determine which financial institutions provide financing options that best fit your type of business and financial needs. Some lenders place limits on certain types of loans or even reject applications in specific industries. Although most financial institutions require small businesses to provide similar information when applying for loans, you’ll benefit from verifying the exact documents you need to complete the application. This will prevent any delays and help you avoid sending loan requests that are likely to get rejected.
Securing financing for your business can help you move beyond financial obstacles as well as improve your profits. It’s important to do your research and gather all of the documents you need to complete the process.
Most small-business owners need either loans or some other sort of funding to get their business going or to expand if and when that time comes. Before making the decision on how to fund your business needs, it helps to explore the options that are out there.
There are basically two main choices to fund your business: loans or investment. You also may be able to qualify for certain government grants depending on your type of business. Each type of funding mechanism has both pros and cons, and it’s important to carefully weigh the benefits and drawbacks of each.
Loans are a good way to fund start-up costs and expansion. The advantage of a loan is that you create a temporary liability that disappears after you make your payments. On the other hand, loans can be hard to get, and you may have to put up collateral or make a personal guarantee that could cause you to lose property or assets if your business fails.
Taking on investors can be a good idea if you have the kind of business that has the potential to grow large and needs a lot of capital to fund startup and fast expansion. One big advantage with investment is that the investors take on the risk of failure. If the business fails, you owe the investor nothing other than whatever his or her stake in the company is worth at the time. Investment does have some downside however. Not only do you give up an ownership stake in your company, you also may have to cede some control over decision-making
Government grants are available to certain businesses, and the advantage is that it basically is free money. However, grants have drawbacks. They are very hard to get and may have very strict rules about how you use the money.