June 13, 2018
Unbiased Financial Information Provided by Financial Finesse
Obtaining a loan for your growing business is an exciting and frightening prospect. Exciting, because someone other than you thinks your business is a good investment. Frightening, because you have a lot to lose if you're both wrong.
If you believe in your business and have decided that a loan is worth the expense and the risk, then it's time to go out and get one.
How Do I Get a Loan?
1. Invest your own money first. Lenders want you to have a financial stake in your company. If you don't believe in your business strongly enough to invest, why should they? You'll need to have already invested 25 to 50 percent of the requested loan amount to be considered for conventional funding. Don't look to a lender to underwrite your entire business.
2. Develop a business plan/loan package. A business plan shows that you have goals and understand what it takes to meet them. Explain market conditions and how your business fits in. Include the following items in the loan package for the best chances of success:
- Loan purpose. How much money do you need and why? Justify this in writing.
- Cash flow. Be prepared to show a lender your past and projected cash flow statements with the loan included in the projections.
- Repayment proposal. Describe how you'll pay back the loan using the projected cash flow statements.
- Management/experience. Your chances are better if you've had experience in the kind of business you're starting. Include an employment history for yourself and key employees or partners.
- Partnerships. If your business has big clients or funders who can validate your business plan, name them in the package.
- Collateral. You'll usually need collateral, such as a house, stocks, or accounts receivable, to show lenders that if your business can't generate the revenue to make the payments, there are other financial sources to draw from.
- Credit. You'll need good personal credit to qualify for most loans. Your ability to manage your own finances is an indication to lenders of how you'll manage your business finances. Your personal and business tax returns should be available, and your taxes should be paid to date. The Small Business Administration (SBA), a government agency that helps small businesses get the financing they need, may be able to help if your credit isn't ideal. While the SBA doesn't provide loans itself, it guarantees (or insures) loans that lenders might otherwise deny.
3. Find a lender. If you already have a lender, contact them first. If you don't have one, you can ask owners of similar businesses who they have used. Lenders who don't feel you qualify for a loan without a guaranty (a commitment from another entity that it will pay up if you default) may ask for it from the SBA. You can also contact your local SBA office directly and get a listing of SBA-certified lenders.
Free and confidential advice on just about every business-related topic, including funding, is available from the SBA and SCORE, the Service Corps of Retired Executives.