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Whether your small business is a start-up venture or an established company, you may need to get a small business loan. Small business owners may apply for loans to pay for any type of business expense, including property, improvements, equipment or working capital. To successfully obtain a loan you must prove that you are a good credit risk, you need the money and that your business will be profitable. This guide will show you everything you need to know to get your financing.
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Introduction
- Depending on your personal and business risk level, a small business loan may be simple or difficult to obtain. To successfully obtain a small business loan, you will need to explain to the lender why you need the money and why you expect your business to be profitable. A business loan may be used for a variety of business needs, including day-to-day expenses, major fixed assets, equipment and start-up costs.
- Don't be intimidated by the thought of applying for a loan. As long as you have the right preparation, good credit history, a thought-out business plan and a professional loan proposal, a small business loan is attainable.
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Step 1: Know Your Personal Credit History
- A clean personal credit history is the most important requirement for obtaining a small business loan. The bank or credit institution will look at the owner's credit report to judge the owner's creditworthiness. Creditworthiness is the likelihood the individual will repay the loan. This will tell the lender how risky the loan will be. So the first thing that must be done is to learn what is on your credit report.
- You can request your credit report from three main companies: Experian, TransUnion and Equifax.
- To learn how to get a free credit report, check out Mahalo's How to Get a Free Credit Report.
- Know your credit score.
- Different lenders may have different minimum credit score requirements.
- Your credit score will depend on your payment history, outstanding debt, length of credit history and type of credit you already have.Small Business Administration: Finance Start-Up
- Check your report for mistakes and inaccuracies.
- Be able to explain problems like missed payments.About.com: The First Time Small Business Loan
Step 2: Write a Business Plan
- Before you even think about walking into a credit institution and applying for a loan, you better have a solid business plan. Lenders will not take you seriously unless you are well-prepared and can show how your business plans to be profitable. Here are a few tips:
- Gather all financial statements.
- Figure out what your business is worth and projections of what it will be worth in the future.About.com: How to Win Small Business Loans
- Describe your business assets.
- Include an owner bio.
- Include a market analysis.About.com: How to Apply for a Small Business Loan
- Try to be as detailed as possible.
- For more information, check out Mahalo's How to Write a Business Plan.
Step 3: Write a Loan Proposal
- Now that you have your business plan and financial documents available, you'll need to put together a well-written, professional loan proposal. Contact the lender to find out the preferred proposal format, but no matter the format, the proposal should include the following sections:
- Executive summary
- This should serve as a cover letter.
- Business description that includes:
- The history of the business
- Current activities
- Type of business and the product or service you are providing
- Legal structure (For example: sole proprietorship)
- Location
- Market
- Customers
- CompetitionSmall Business Administration: North American Industry Classification Codes
- Management profile
- The owner's or owners' experience, qualifications, education and credentials.
- Financial information, including:
- Personal financial statements
- Business financial statements
- Prior year's federal income tax return
- Explanation of significant trends
- Projections for at least the next two years, including:
- Loan request
- Tell the bank how much money you need
- Describe how the loan will be used
- Repayment plans
- Propose the terms you want (this will open negotiation with the bank). Be prepared to not get exactly what you want
- Describe how and when the loan will be repaid
- Collateral
- Describe what assets you will use to secure the loan.Zions Bank: How to Write a Loan Proposal
Step 4: Determine the Type of Loan You'll Need
- Once you figure out how much money you need, what the money is for and when you'll be able to repay the loan, you'll be able to determine what type of a small business loan you'll need. Common loan types include:
- Micro loan: A long-term loan under $35,000 for a new small business.
- This loan can be used for any business purpose, such as day-to-day expenses or equipment.BusinessFinance.com: Micro Loan
- SBA loan: A long-term loan guaranteed by the Small Business Administration.
- You will need collateral and a good personal credit history.Small Business Administration: SBA Loan
- Development financing: A long-term loan used for major fixed assets like real estate, renovations and machinery.BusinessFinance.com: Development Financing
- Lines of credit: A short-term loan used as working capital for daily operations.BankRate.com: Business banking: Common types of loans
Step 5: Choose a Lender
- Once you are prepared, it is time to choose a lender.
- Start with banks and credit institutions you already do business with.
- Make sure your account is in good standing. This will help establish that you are a good risk.
- Look around for the best offer.
- Try both large and small banks, but make sure they have the authority to lend you the amount you need.Small Business Administration: Developing Your Loan Proposal
- Credit unions are also an option.
- Make sure the lender can fulfill your needs.
- Look for lenders that have experience with businesses similar to yours.
- For best results, once you decide on a lender:
- Fill out the application before you meet with the lender.
- Prepare a presentation packet that includes:About.com: How to Apply for a Small Business Loan
- Business plan
- Loan proposal
- Loan application
- Resume
- Visual aids like charts and graphs
- Make an appointment.
- Dress professionally.
- Be on time.
Step 6: If Your Loan is Approved
- Congratulations! Here's what to do:
- Before signing, review all documents carefully.
- Make sure you understand the terms: repayment schedules, collateral, interest rates, etc.
- Make a good impression by promptly returning all documents.
- Communicate.
- Establish a good relationship with your loan officer.
- Try providing progress reports.
- If you have any problems, tell your loan officer immediately.Small Business Administration: Developing Your Loan Proposal
Step 7: If Your Loan is Denied
- First of all, don't give up. Just because one bank or credit institution denied your loan application, doesn't mean they all will. Stay positive and keep trying.
- Ask the loan officer why your loan was denied.Small Business Administration: Developing Your Loan Proposal
- Once you know why you were denied, you can work on improving that area or changing your strategy.
- Ask your local Small Business Administration for advice.
- You can also try a local chapter of the Small Business Development Center or a local chapter of the nonprofit small business counseling association SCORE.About.com: How to Apply for a Small Business Loan
- If you can't get a small business loan, you may have other financing options:
- Government grants
- Funding from nonprofit organizations.
- Funding from community organizations
- Private investors
- You may also want to try Business.gov's Loans, Grants and Financing Search.
Conclusion
With a clean credit history, a good business plan and a persuasive loan proposal, you should be able to show a lender why you need a small business loan and how your business will be profitable if you get one. Remember to be confident, sell yourself and don't get discouraged if you get rejected.
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