To get a loan, first decide the type of loan needed to fund your business. Then determine if you qualify for the loan by assessing your business’s financial health, creditworthiness, collateral requirements and the lender’s criteria. Also consider if you can afford the loan repayments. Apply by filling out the loan application form completely and precisely. Submit the application and required documents to the lender for review.
The Challenge of Securing a Small Business Loan
With stricter regulations after the recession, it has become harder for small businesses to get loans from banks. Banks rely heavily on credit scores to determine risk. If you have bad credit, it is much harder to qualify.
The Small Business Administration guarantees a portion of small business loans to reduce risk for lenders. They focus on disadvantaged companies that may have trouble getting traditional loans. There are several types of SBA loans, like the popular 7(a) term loan.
You usually need some of your own money – sometimes tens of thousands of dollars – plus a comprehensive business plan to have a chance at qualifying for a small business loan. Building that business plan takes weeks of full-time work. You also need to provide things like detailed financial forecasts, lawyer fees, and accountant approvals. It’s very difficult.
Banks get concerned about falling asset values and credit quality when the Federal Reserve raises interest rates, as they then must pay depositors more to retain money instead of it moving to higher-yield investments. This makes them more cautious about lending.
You don’t always need money or collateral to get a first-time business loan, but you should have a track record of making money and positive cash flow. Even with bad credit or limited time in business, online lenders may provide financing. You need proper paperwork – tax returns, business financials, licenses, and a viable business plan.
While steps vary by loan type, gathering financial documents is critical when applying for a small business loan. Lenders review things like balance sheets, profit/loss statements, and cash flow analyses to determine if they will provide financing. Direct lenders like banks and credit unions used to be the only options, but now online lenders provide more choices.
Loans for “risky” businesses like restaurants and packaged goods historically had restricted access due to perceived higher failure rates. However, data shows restaurants actually have similar failure rates to other industries. Still, stigma persists and makes getting traditional funding difficult. With Friends and family loans, you borrow from those close to you rather than a bank. This can provide favorable rates and terms.
About 1 in 6 small business loan applications are rejected. Approval rates vary by industry and lender. Banks have lower approval rates than alternative online lenders. Term loans are most common, ranging from short-term (3-12 months) to medium-term (1-5 years) to long-term (5+ years). Understanding eligibility for a small business loan is key, especially early on.
Loans for Starting a Business
This article explores the different types of loans available to start a business, what to consider before applying, tips for securing a loan, the benefits and drawbacks of taking out a loan, and how to find the right lender.
The problem with starting a business with a loan is that you’re already starting on the back-foot. Building a business requires hard work and consistency. World-renowned entrepreneur Mark Cuban said anyone who starts a business with a loan is a “moron”. He pointed out that there are uncertainties in running a business, with the one certainty being you’ll have to pay back your loan.
If you are planning on starting a business, the amount of loan you will need depends on the type and size of business. Start-up loans from banks usually range from $500 to $700,000. To get approved for a large loan, you’ll need a large personal income to ensure you can pay the bank back.
The bottom line is there are pros and cons to taking out a loan. You should carefully consider all factors before deciding.
Steps to Obtain a Startup Loan
- Get your financial requirements and business plan together. Figure out how much you need and show how your business will succeed.
- Consider which type of loan to apply for. Term loans allow you to pay off a large amount over years. Lines of credit provide flexibility. SBA loans help those with bad credit.
- Improve your chances by having good credit, collateral, and showing you can repay the loan.
- Find the right lender. Banks have strict criteria. Online lenders may suit those unable to get traditional loans.
With the right preparation and research, you can get funding to start your business. Assess your options, put together a strong application, and persevere through the process.