How to Get A Business Loan or A Small Business Loan

How to Get A Business Loan or A Small Business Loan

Posted 07.03.2012 in Articles by Angela

With the economy still battling an upstream current, getting a business loan requires a lot of consideration and realistic thinking. Opening up a cupcake shop may be your dream, but waking up one morning with a pile of defaulting loan payments certainly isn't. Many business and small business loans are denied due to poor planning and unrealistic expectations of success. Getting a business loan has become harder than ever.  Knowing exactly what you want and why you want it before applying will help your chances of ultimately landing a loan. Here are a few tips to help you start on your way to achieving your dream of owning your own business.

Before beginning your loan application, consider the problem from the point of view of the bankers. They need to make loans to make a living, but on the other hand, small businesses just starting up can be a heavy risk. Be prepared to show that you have considered the risk option, but you are confident in the success of your venture. Do your research and homework; always err on the side of over-preparation. Invest yourself in your business; you have to be willing to take a risk as well. Be aware that most banks will want collateral.

Firstly, know exactly how much you money on need, and what it will be used for. Banks want all the details, especially where their money is going. Be very accurate in your response; don't ask for too low an amount, but if you're going to ask for a lot, be very clear what it's going to be for and be confident that you can repay it. Be prepared with documents: the completed loan application, financial projections for the next few years, the whole gamut. Ask yourself how long the repayment term for the loan should be and what you have to use as collateral. Explain to the lender very clearly when you expect to repay the loan. Have a very cogent, precise, specific plan and realistic projections. 

Present yourself well. Remember that banks are judging you on your character as much as everything else. Aside from being confident and prepared, dress professionally and bring documents to verify your own credibility. The success of your business depends on you, so make sure you prove that you have expertise in the field. Show your commitment—tell the bank how much you personally are investing into the business. Show that you are aware of the risk, and discuss how you are going to manage possible failure or setbacks. Support everything you say with clear data and facts. 

To raise your chances of getting a loan, consider a cosigner. You and your spouse or you and a business partner, if signing together for a loan, will lower the risk and make it more likely that your loan application is approved. Business owners sometimes have to put up a lot of collateral, which could include their own home. Be aware of how much you are ready to put up—how much are you willing to risk? Are you willing to risk your entire retirement fund—which is probably not a good idea? 

Consider what type of loans you are going to apply for. The Small Business Administration (SBA.gov) has three types of loans available: the 7(a) loan, giving financial help to businesses with special requirements such as those that help control pollution, rural-based businesses, or exporters. The Microloan program gives small, short-term loans to non-profit child-care centers and businesses who will use the money for capital, or for purchasing supplies, inventory, furniture or fixtures, machinery, or equipment. The CDC/504 Loan Program gives approved small businesses long-term, fixed-rate loans with up to 90% financing. These governmental operations have the advantage of low interest rates and are very helpful to small businesses, but the application process is long and they are generally hard to get.

Consider looking for other sources than just the bank. For example, consider angel investors or venture capitalists. Angel investors are those that probably have some interest in your business field and will put in money, expecting a certain return, and also help you with your business. Venture capitalists also invest money—but they have a much higher expectation for returns, 25% and up. Venture capitalists may also have no knowledge of your field and just provide the money. Both venture capitalists and angel investors can help a company start up so that the business owner does not get one lump loan from a single bank. 

Make sure you do your research about the different loans. Ensure that your business plan will fit with the loan you are applying for. Don't enter into a loan which you are unsure you can pay. Don't overestimate your chances of success. Don't be too hasty in going to venture capitalists or other investors who may expect a high return of pay, and be prepared and intelligent about how much you're willing to invest of your own assets into your venture. Don't invest so much that you'll lose your house or your retirement fund. If you get friends or family to chip in to your venture, be good to them—don't ruin a relationship because you can't repay their money. Also consider that small banks may be more flexible than large banks in loan payments and policies; on the flip side, they may be struggling and not have enough capital to give you a loan. 

When new entrepreneurs are looking to start up a business, finding a loan can be extremely difficult. The first loan is usually the most difficult. Sell yourself as credible and stick to your plan; do you research and homework and be knowledgeable about your field, the competition, and the risks. Be practical and realistic when putting together your business plan, but, too, be confident that your business will succeed. 

 

Image (CC) andrewmediaprod 

 

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