Business loans are among the most common ways small companies opt to finance their operations. But actually getting a loan can sometimes be tricky – you generally can’t just waltz into a bank and expect to walk out with hundreds of thousands of dollars for you company. There are rules to be followed, and you need to do your research and be prepared with paperwork when you approach a lender.
The first thing to note is that it can be very difficult for businesses under a year old to get a loan. Difficult, but not impossible. Whether you are a brand new business, or one who is looking for a little extra funding, here are four things to keep in mind when trying to secure a loan.
Know What Type of Loan You’re Looking For
Your very first step should be to know why you are seeking money in the first place, and what type of loan may be best for you. The average business loan is somewhere in the range of $130,000-$140,000, but a lot of businesses aren’t looking for that much money.
If you are a new business, or are looking for loans under $35,000, consider microlenders. We talked a little about these lenders in our last blog post, and they’re a great resource for businesses who are brand new. The non-profits that offer microloans often offer them at a higher APR than a bank loan, but they are easier to obtain for startups, as well as those with poor credit.
If you’re in search of money for daily operations, a short-term loan might be right for you. This type of loan offers quick cash up front, but requires payment quickly. You may also be able to open a line of credit with a bank that operates like a credit card – you charge the money that you need, and pay it back over a certain amount of time. For these loans, you’ll need good credit and some business history that will allow banks to feel comfortable that you will pay back the money on time.
Is your business growing? This is the type of loan most business owners generally think of when looking for a loan – a larger sum of cash with fixed payments. You can use these loans for business improvements, equipment, and more…whatever you need to take your business to the next level. But be ready to provide a lot of information about your company as part of the application process.
Do Research On Possible Lenders
Once you know what type of loan you’re looking for, it’s time to start research on who the best lenders will be for your business. A good rule of thumb is to start with the institutions you have relationships with. Are you already working with a bank in your community? Start there – having an established relationship may open doors that would otherwise be closed to complete strangers.
Next, take a look at banks or lending institutions that are friendly to your particular industry. Do you know of others in your field who have worked with a certain lender and had success? It might be worth checking out their website and stopping in to talk to a bank representative to see what’s offered.
If you’re a startup, you are likely going to want to look at microlenders. One of the best places to start is the U.S. Small Business Administration – they have a number of lending programs for startups and companies looking for small amounts of money. They can point you in the right direction for your community.
If you are looking for quick cash, and don’t have the best credit or operating history, you may want to check out online lenders, such as Kabbage. These lenders have high APR (sometimes over 100%…OUCH), but you will get money quickly. I’d only recommend these lenders in very specific circumstances, and you’d better be sure you can pay them off when you need to.
Write a Stellar Business Plan & Have Info on Cash Flow Projections
The best way you can prepare for applying for a business loan is to have all of your information on hand. You’ll need your credit score, your business financial records, business history, legal documents proving that you have a legitimate business, and a plan for what you envision doing with the money a bank loans you.
Your business plan and cash flow projections should be as detailed as possible. At this point, you are selling your vision to lenders, so you need to show them that the vision is grounded in reality. Spell out how your business currently works, how much money you are bringing in, and how a loan can make your business better financially. Show the banks that you are a low-risk lender, and that you intend on having a long, successful history with their institution. Having actual numbers on hand is going to go so much further than a PowerPoint based on promises but no evidence.
Have Great Credit
Start planning from the minute you start your business for the day that you might need a small business loan. That means making your payments on time, not bouncing checks, and basically being financially responsible. If you approach a lender with stellar credit, you are already starting out as a lower risk candidate, and are more likely to get the funds you need.
If you have bad credit, start working right now on turning that around. You still have lending options, such as microloans or online lenders, but they come at a price. Absolutely do not take out loans that you think you will not be able to pay back – this will only make your credit worse. But if you are in a position to improve and build yourself into a good credit risk, then go for it!
The Bottom Line: Business loans are a better option for companies that have been around for a few years, but that doesn’t mean that all is lost for startups…you just have a much steeper hill to climb. Analyze your reasons for wanting a loan, research your lenders, keep your business in good financial standing, and make sure you provide solid information on business successes, and you’ll be on the road to securing the cash you need for improvements.