There are many types of stressors involved with starting and running a small business. Getting a loan may be one of the most intimidating aspects, no matter what kind of business you run. Understanding the process and knowing what to expect can help minimize unnecessary frustration or confusion.
Understanding the Process
If you are considering a small business loan determining the specific reasons first will help ease the overall process. The more details you can provide about the loan’s purpose, the more likely they will approve your application.
Consider the following questions to focus your current business goals:
- Do you need the money for the initial startup, like hiring employees or buying special equipment?
- Is the money for future expansion, like a new building, more products, or more employees?
- Is the money to pay the bills or employees during reoccurring slow seasons?
- Is the money for stocking up before busy seasons?
- Is the money for an emergency expense? If so, what?
- Do you really need the money, or can you figure out another way to achieve the same results?
Once you have determined the reason or reasons, you will be able to calculate a more accurate figure for the loan. Cutting unnecessary amounts makes your application more attractive and ultimately keeps your future payments manageable.
Before you even set out, remember that banks are high-risk averse, and small business is the definition of high-risk. Thus, the process for a small business loan is often tedious and drawn out.
The application requires several detailed documents, both business-related and personal. Sometimes you will need references from past work experience.
You will most likely talk to more than one lender. That is recommended to find the best rates and terms. Overall, the experience can be seen as a combination of applying to a university and car shopping.
You will need to show that you believe in your own business in your application. You should have a solid understanding of your financial situation. Consider what you own that can be used as collateral for the loan.
Also, show how you have personally invested in your business. This tells the bank that you are serious and believe your company will thrive.
As you look for banks, remember that a loan is binding. Always read the fine print and ask questions on anything you are unsure about. Do some research and prepare your questions beforehand. Consider the following questions for a lender:
- Do they have any experience with businesses like yours?
- How much do they typically loan to businesses like yours?
- What specific documents do they require?
- Who is in charge of the application?
- What is the time frame for their application process?
- Are their interest rates fixed or variable?
- What are the penalties associated with the loan?
Types of Banks & Business Loans
Navigating the myriad banks and types of loans out there can be a daunting task. However, once you have an understanding of what’s out there, you can determine a general direction to proceed.
Consider the first Small Business Administration (SBA) backed banks, as those banks will have the best terms. They typically have lower interest rates and more flexible repayment options.
Keep in mind that even though the SBA collectively backs them, each will have their requirements.
You should only consider online lenders as a last-ditch approach. They do provide quicker funding, especially for those with bad credit, but also require steep interest rates and stingy repayment terms. They are not all created equal, as some will be far less trustworthy than others.
Though not all lenders may offer all the options, there are a variety of loans that are available for your specific needs and means:
- Secured loans – requires collateral • Unsecured business loans – no collateral and typically lower interest rates, often only offered with businesses with established credit
- Lines of credit – works like a credit card
- Merchant cash advances – given and paid back based on monthly sales
- Accounts receivable loans – uses receivables (outstanding invoices or money owed) as collateral
- Equipment loans – specific for new equipment, which in turn is used as collateral
- Construction loans – particular for new construction, with the building becoming the collateral
For each type of loan, the requirements, payment structure, and time length, and interest rates may vary significantly.
Possibly Required Documents
Every lender has specific requirements for their loan application, but the following is a general list of documents needed.
Use it to help you mentally prepare but only spend time gathering the information after you determine which documents you need, as the process of gathering may prove difficult.
- A detailed plan for how you will use the loan
- Tax returns
- Past 3-5 years of company revenue
- Bank statements
- Credit information
- Cash flow history and future projections
- Business license and certificates
- Current profit and loss statements
- Top executives’ detailed resumes
- All legal agreements, including franchises and partnerships
- Credit information
- Bank statements
- Resume and references
Now that you have an overview of the “what” and “how” of small business loans, you can be more confident in making the right decision for your company.
A loan is not always the right choice for everyone, as many small companies have taken off without it. But for those with a specific plan and vision, the loan can be just what their company needs to reach the next level of success. As with anything business-related, consider first the costs against the benefits.
If you decide to go for a loan, be meticulous and cautious. Ask the right questions, and if something doesn’t feel right to you with a lender, don’t be afraid to move on to another.
Brushing off issues now will only cost you and your business later on.