Determine Your Capital Needs
In borrowing for your small business, it's important to determine your capital needs to borrow the right amount of money. Both start-ups and existing businesses pose the obvious question when it comes to borrowing: What will the loan funds be used for?
Make a thorough inventory of office, businessspace and equipment needs, based on thorough research into your industry. Can you use your phone, vehicle, or set-up office space in your home? Where can you economize? Some startups, forexample retailers or print shops, need to rent space or buy capital equipment. Only purchase what you need to open your doors. Do not saddle the venture with unnecessary overhead or expense. How much capital do you need to set up the fixtures, equipment and location of your business?
Calculate operating costs including promotion, payroll, rent, supplies, inventory, legal fees and insurance. Project revenues over the first year of business. How long until you break even and make a profit? If you intend to borrow to cover your initial operating costs, calculate how much you need. What is your plan to make loan payments?
Loans for the Going Concern
Existing businesses need capital for a variety of purposes-planned expansion, meeting the needs of new clients, capital equipment and real estate or rental property. A seasonal business needs funds to see it through slow cycles. A close look at your purpose for borrowing helps identify how much to borrow. It's best to anticipate capital needs in advance. Lenders frown on companies in need of quick funds in a crisis.
Small business start-ups are often underwritten with personal funds. Make a careful assessment of how much of your personal savings you are willing to risk on your business. Another source of personal financing is to tap the equity in your home with a home equity loan or line of credit. Should your business fail, you risk losing your home. Avoid tapping into your retirement funds for financing your business.
Small Business Bank Loans
Bank loans are a traditional route for small business financing. Check your credit score and clear up any inaccuracies in your credit report prior to applying for a small business loan. Prepare an inventory of your personal or business assets, as banks require collateral as security on the loan. Business loans have stricter requirements than consumer loans. If you are unable to get a small business loan from a bank, consider online business loan options.
Alternative and Peer-to-peer Lenders
There are alternative and peer-to-peer lenders specializing in small business loans. Alternative lenders function much like a bank or traditional lender, while peer-to-peer lenders enable debt financing where individuals borrow and lend money with no official financial institution involved. Top alternative and peer-to-peer lenders include Lending Club, Kabbage and On Deck.
Small Business Administration
The U.S. Small Business Administration has a variety of loan programs that cater to specific business needs.
Ready, Set, Apply
Traditional lenders such as banks want to see a business plan, an explanation of the purpose of the borrowed money and the cash flow projections to repay it. The business plan includes a portrait of your industry and its business cycles, and information on the management team.
Alternative and peer-to-peer lenders have their own methods for determining your eligibility for a small business loan, looking at your business cash flow, plans and credit score.