Starting a new business venture or expanding an existing one can be exciting. However, businesses require capital which means you might need a business loan. Obtaining a loan is not the most fun aspect of running your business but it can be achieved with a little work and planning.
Remember that as a business owner, you are your business. That means that when you approach your bank for a loan, they will look to you and your personal ability to repay the loan. It is important that you have a clear business plan and forecast for the future of your business and a good track record.
Determining Your Needs and Approaching the Bank
Before you go to the bank, you should determine what your business needs actually are. Consider if you need a large warehouse, more inventory, or if they are wants or needs. A clear reason for the growth of your business is a requirement. You should understand trends and changing economies and how they will affect the future of your business. This will help you understand in securing the business loan.
If you are starting from scratch or buying an existing business, but your past will be as well. It is essential to exhibit experience in the type of business you are starting or buying. You will need to have a strong management background.
Some of the things that banks look for when you apply are your current projected cash flow, your personal financial situation, and the business assets you bring to the table. The Small Business Administration might be able to help you out if you find that your bank is not as excited as you. They can guarantee a portion of your loan, which can encourage the bank to take another look at your proposal.
If you find yourself struggling to decide what type of financing would be a good option for your business, it is important that you seek out professional help form a lender so you can learn more about the variety of opportunities available. There are plenty of opportunities that will mirror the directing in which you and your business are headed. Some type of financing options includes a line of credit, 7a loans, 504 loans, term loans, and much more. These loans have specific advantages so when you are looking for more information about business loans, use some of these options as ideas and see if any are the right kind for you.
Gather the Right Documentation
Here are just a few of the most common things they’ll ask for, but this is not an exhaustive list:
- Business and personal credit scores (note the bank will pull their own copies of these)
- Business bank account statements
- Tax returns and supporting IRS documents for both your business and personal tax accounts
- Any applicable licenses and registrations for doing business in your state
- Other financial documents deemed relevant (i.e. credit card sales, unpaid invoices, and accounts receivable due to you)
- Any legal contracts that would be relevant (franchise, incorporation, leasing)
You may also need:
- Business forecast with details on future cash flow and costs
- Documentation of underserved representation (for loans aimed at women-owned businesses, for example)
- Updated business plan with details on your growth and marketing strategies
Understand the Terms of the Loan
- Ask yourself the following questions before you accept the loan terms:
- How often is the interest payable?
- What is the origination fee (if any)?
- Are there any other costs or fees associated with the loan (underwriting fees, processing fees, etc.)?
- Is there any type of collateral required (not all small business loan lenders require collateral)?
- Do you need to present periodic statements or other documents throughout the duration of your loan period?
- Are there any types of limitations on how the money from your small business loan can be used?
- Can you repay your loan early without penalty (and if there is a penalty, what is it)?
Understanding the terms of your small business loan will help you to ensure that you choose the best one for your needs, and that it helps you to achieve your specific goals.
The Bottom Line
When you need a loan to start your own business, start with traditional banking options such as commercial loans, and then go from there. It might take a little bit of creativity to get the money you need.