Prepare to Apply for Your Small Business Loan
You have big plans for your small business. But if those plans require big money that doesn’t exist in your bank account, a business loan can help. Small business loans can help you start or maintain your business. Learning how to navigate the process ahead of time will help you be successful in obtaining the financing you need.
Many lenders and other financing experts discuss with prospective small business borrowers how to get “credit-ready.” What follows are steps you can follow to get ready to ask for a loan.
Where Can You Get Money for Your Business
There are three sources of funding to start a small business.
- Money that a loan applicant has or is given by family or friends
- Money from an investor
- Business Loan
- Conventional business loan from a bank or other lender
- State or other local lending program
- Business loan supported by the U. S. Small Business Administration (SBA) guaranty
- Microloan lending program
Someone who wants to start a small business often has limited savings, and usually investors are not interested in supporting a business that is just starting and does not have a proven track record. So most often someone who is ready to start a business will need to find an outside source of funding.
If you own a house, you might be able to get a loan based on the home’s equity. And many start-up small business owners use credit cards to provide the necessary funds to open the business. But there are drawbacks to these sources of funding.
- The issuer of the home equity loan or credit card will want to see a reliable source of income that will be available to make the payments. If the borrower is quitting a job to start a new business, that may be a problem.
- The interest rates charged on credit cards is much higher than the interest rate on a business loan, so the business will need to generate more sales in order to pay back the same amount of money.
Given this, we will concentrate on the third category of funding for your business, business loans, and look at what you need to do to get a bank or other lender to say yes to your loan request.
Introduce Your Business to a Lender
We live in a world saturated with electronic devices and options available that do not require a personal touch. However, it is usually best for anyone who is thinking of opening a small business, or needing funding to expand their business, to deal face-to-face with a lender.
Building a relationship with your lender is crucial. A lender may well be able to gauge through a credit report how likely a busines owner is to repay his or her business loan. However, it is very impersonal. Often the factor that turns a loan decision to a yes is the passion that the lender sees in the loan applicant.
If you are committing to starting a business, you should start cultivating a business banking relationship. Open necessary accounts such as checking and payroll accounts. Establish a merchant credit card relationship if you will allow your customers to make payments with credit and/or debit cards. And, as much as possible, maintain a face-to-face relationship with your banker since that person may also become the lender that provides your small business loan.
What You Need to Know about Traditional Lenders
Most people, when thinking of obtaining financing, look first to a bank. And yes, there are all kinds of comments and jokes about cold-hearted bankers. But the actual truth about banks, and lenders, is that they want to make loans. Their business is to make loans.
It is important to remember though, that banks are regulated. This means that they must follow very strict rules about lending. They must follow their regulators requirements regarding how much risk they can take on (that is, the risk of losing all or some of the money they agree to lend).
Since small business loans are typically regarded as more risky than the business loans made to larger or more established businesses, a new business owner has to work harder to persuade a bank lender that making a loan to their business would be a smart decision. Which takes us back to why a personal relationship with your lender can be very important in getting a loan.
There are many loan sources other than banks that provide loans for small businesses. These include:
- Credit Unions: Many credit unions are adding small business lending to the services they provide. Since many credit unions have memberships limited to a particular community or employer, they tend to have a more relationship-focused view of lending which can be good for a business owner who needs a first loan in a smaller amount.
- Community-based lending programs
- Online lending platforms
In many areas of the country there are established microlenders that can provide smaller loans, called microloans, that are also coupled with the provision of technical assistance (advice) to the business owner(s). Microloans are typically loans granted under $50,000.
Community Concepts Finance Corporation is such a lender. We look forward to working with any business in the communities we serve that has found it difficult to obtain financing through traditional lending sources.
Prepare to Ask for a Loan
Applying for a business loan is way more than submitting a filled-in loan application. Without telling your business’ story your request is more likely to result in having the loan turned down. Among other things, you will need to provide a summary of your loan request: how much money you are asking for, what you will use it for, and how you will pay it back. You will also need to provide information on the financial condition of your business.
Tell Your Business’ Story
Business Plan: If you plan to apply with a financial institution for a loan, a business plan is required. Potential investors and supporters want to see the true potential of your business clearly laid out in hard facts and numbers. A business plan is the best, and generally, the only acceptable way to provide this information. Writing a business plan speaks of your character and your potential to run a successful business.
For you as a business owner there are definite benefits in writing a business plan and using it to guide you in your business activities that go way beyond just obtaining financing. Here are some of the benefits of utilizing a business plan.
- A Business Plan Helps You Make Decisions: If you are pressed on a certain point when running your business, you cannot efficiently make a decision if you are on the fence, undecided, or not fully committed. Business plans help you eliminate gray areas because you must write down specific information in black and white. Making tough decisions is often one of the hardest and most useful parts of writing a business plan.
- A Business Plan Can Be a Reality Check: Writing a business plan is often the first real struggle for the small business owner. Business owners want to think about the positives of their venture, and do not want to consider that there are possible flaws, or thoughts that aren’t fully developed. However, identifying gaps early in the process gives a business owner a chance to shore up their ideas and take steps to make their business model stronger and more viable.
- A Business Plan Can Give You New Ideas: Discovering new ideas, different approaches, and fresh perspectives are some of the best things that can come from the business planning process.
A business plan is a useful document for any small business owner. When you use your business plan as a tool to help you outline action items, next steps, and future activities, you are creating a living, breathing document that not only outlines where you are and where you want to be, but also gives you the directions you need to get there.
For more detailed information on writing a business plan check out “Business Plans” (create hyperlink) on our website.
Financial Information: Lenders will require that any small business owner looking for a loan provide financial information about the business. This is the area where it is very important that you seek expert assistance when needed. Know that as the business owner, you must understand and agree with all financial documents you share with a lender and be prepared to explain them.
You will need to provide financial statements dated within 90 days of the date of your application. These statements will need to include:
- Year End Balance Sheet for the last three years.
- Year End Profit and Loss statements for the last three years.
- Filed Tax Returns for the last three years, or years in business.
- Cash Flow Projections.
For more detailed information on financial reporting check out “Financial Management” (create hyperlink) on our website.
The Basics of Your Loan Request
Any lender will be looking to see a reasonable request that is adequate to meet the needs of the business without being extravagant. You should be aware that lenders do not like to see loan requests that seem excessive based on the purpose for which the money will be used. As an example, it is not realistic to ask for $25,000 for a piece of equipment that costs $10,000. If you are uncertain about how much to ask for, seek assistance and advice from a business advisor since it is important to be realistic and accurate in determining the amount you need.
Loans used to acquire hard assets like real estate and equipment are easier to get than loans that will be used for working capital. This is because the assets that are purchased will be pledged to secure the loan.
Working capital is money needed to help pay daily expenses like rent, utilities, employee salaries and inventory. If this is the type of loan you need you should break out the various purposes for which the loan finds will be used – for example how much will be used for rent, how much will be used for utilities, how much will be used for employee salaries, and how much will be used for inventory.
Loans for a one-time purpose such as purchasing a building or piece of equipment will be provided as a term loan. With a term loan you will get a set amount of money that you will pay back during a specified period of time.
Loans to cover ongoing needs are provided as a line of credit. A line of credit allows you to borrow up to a maximum amount of money, repay some of it, and borrow more up to the maximum loan amount, so that you always have money available when you need it.
You will always want a loan term that is appropriate to the loan purpose. Lenders will be willing to offer a longer repayment time for loans that will be used to buy real estate or equipment that has a long usable life. Lenders will be willing to offer shorter repayment time for loans that are used for equipment that will need to be replaced in a few years, and for working capital.
The proceeds from a business loan can help you start your business, help your business survive a slow season, help you buy essential equipment, or expand your business. For whatever purpose, getting a business loan should not be taken lightly. Before you apply for a loan, do your homework. Identify the best lending source for you. Build a relationship with your bank and your lender. Identify your business goals and how financing can help you achieve them. By taking the time to research the right loan option for your business, you will improve the odds of getting the money you need.
The above article is an adaptation of information obtained from the following sources:
Money Smart for Small Business: a curriculum developed jointly by the Federal Deposit Insurance Corporation (FDIC) and the U. S. Small Business Administration (SBA), published September, 2016 with no copyright restriction.
Business Smart Workshop: a resource developed jointly by the SBA and the National Association of Government Guaranteed Lenders (NAGGL), published with no copyright restriction.
This instructional article is intended as general guidance only and may or may not apply to a particular situation based on the circumstances. This article does not create any legal rights or impose any legally binding requirements or obligations on Community Concepts Finance Corporation (CCFC) and Community Concepts Inc (CCI). CCFC and CCI make no claims or guarantees regarding the accuracy or timeliness of this information and material.
The content of this article is not designed or intended to provide authoritative financial, accounting, investment, legal, or other professional advice which may be reasonably relied on by its readers. If expert assistance in any of these areas is required, the services of a qualified professional should be sought.
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