Whether you're an entrepreneur with a brilliant startup plan, or the owner of a going concern, securing finance for your business is of critical importance to the success of the operation. It's not unusual to find the prospect of borrowing money daunting. With proper organization and planning, you can find the right loan for your business. Here are a few tips on doing just that.
Look Like a Successful Loan Applicant
Requirements vary from bank to bank (and other lending institutions), here are some of the prerequisites. First, the loan should be for a well-defined purpose, such as funding receivables or purchasing capital equipment. Lenders want you and any partners to be of good character, have a track record, and have good personal or business credit history. They also look for the ability to make payments, often based on collateral. As owner, you are expected to have a personal investment in the business.
Bring Complete Information to the Lender
The potential lender wants to see your personal financial statement along with that of your business. Startups need to provide projected financials. Your personal and business credit history will be scrutinized by the lender. You'll provide a detailed business plan including bios of you, your partners and key managers. Of course, you'll provide a personal guarantee from all owners of the business when you apply for a small business loan.
Streamline your Borrowing Process
Get you financial house in order and be frank with potential lenders. Carefully consider which lender to approach. Consider a lender with a transparent, user friendly application process like Lending Club. The big banks may be less interested in small loans. Look at banks you already work with, and consider credit unions and community banks. Interview loan officers, asking what documents they need. Bring them exactly what they want with your small business loan application.
Calculate How Much to Borrow
The amount depends on your business. Are you a one-person operation, or do you employ dozens or hundreds of people? The median small business loan from the banking industry is about $130,000 - $140,000, and such loans range up to about $250,000, according to the Small Business Administration (SBA). The SBA itself offers loan programs making loans from $5,000 on up to guaranteed loans of $5 million.
Start-up or Going Concern?
Commercial banks often prefer to fund expansion of an existing business to taking a chance on a start-up. With a good personal credit history, sufficient personal assets and collateral, your start-up may qualify for financing with small community banks, peer-to-peer lenders, credit unions and community financial institutions. Prosper is an attractive peer-to-peer lender for the start-up business, while Kabbage is an online lender with a unique loan qualification process that is a good bet for the going concern.
Getting a Small Business Loan with Bad Credit
Even those with a prior bankruptcy or low credit score can secure financing for a small business. Typically, lenders will ask for collateral or a co-signer with your loan application. In the case of a co-signer, be sure you can make good on the payments. Peer-to-peer lenders may approve loans for those with lower credit scores at a higher interest rate.
With thorough preparation, you can take the guess work out of applying for the right small business loan and be successful in securing financing. While the traditional bank loan has its place, it's important to consider the options-small community banks, credit unions, SBA loan programs and innovative online lenders.