Let’s face it. Starting a business requires cash. Cash you may not have on hand.
On average, a small business starting out needs anywhere from $2,000 to $5,000 up front. And that’s only to get it off the ground.
So, what does a new business owner do when cash is hard to come by? You can start by applying for a business loan.
Getting a business loan isn’t easy, though. You’ll need to follow some key guidelines to get one.
Here’s what you need to know.
How To: Getting a Business Loan
You can get a business loan for your startup. It’s like interviewing for a job or representing yourself in court.
You’ll need to convince the loan officer that you are a good investment with low risk to the bank.
First, you need to prepare for what lenders will expect. Then, gather your materials and present your case. Here are the key areas you’ll need to concentrate on.
1. Update Your Business Plan
The strongest case for your loan is your business plan. A developed business plan shows you are serious about conducting business. And you have a plan.
It also gives them a sense of the direction your business is going in. This all comes together to make you a more credible borrower.
Here are a few areas of your business plan to update before you meet with lenders.
- Goals and Objectives
- 3 and 5 Year Projected Financials
- Cash Flows
- Income and Expense Projections
Your business plan is solid support for how you expect your business to build profits. Once you’ve updated it, print a few copies to bring to lender meetings.
2. Write a Request Letter
Remember writing those persuasive letters in high school? It’s time to dust off those skills.
This document works much like a cover letter when applying for a job. It introduces the lender to your borrowing intentions. State your case in clear and concise terms.
Write a loan request letter that includes three main areas of focus.
- Your formal request for the loan
- Why you need the money
- How it will help your business become profitable
This helps the loan officer understand your intentions as a borrower.
3. Gather Your Documents
Your business plan and request letter are only the beginning. There are several documents your lender will need to qualify you for a business loan.
You’ll need proof of any current income. That can come in the form of tax returns, banks statements, and even receipts from customers.
Bring your business insurance policy and all legal business documents. That could include licenses and registration at the state and federal levels.
4. Find the Right Lender
Now that you have all your documents together, it’s time to search for a lender. Not just any lender, though. You want one that offers the right loan product for your business.
Types of Lenders
You can get a loan from several places. A bank, an online lender, or an investment organization are the most common. The one you choose depends on what will best benefit your business.
By that, I mean you need to look at what you qualify for and the terms of the loan. Let’s look at the types of loans you might encounter.
Types of Business Loans
Business loans come in a few varieties. What you qualify for varies from situation to situation.
Here’s what you need to know about each type of business loan.
Term Loans
This is a lump sum loan with repayment options according to a schedule. You can get this type of loan within a week or two of approval. You may also need to provide collateral to secure the loan.
Rates depend on your credit history and score. You can read more here about term loans and calculating a possible monthly payment.
SBA Loans
These are loans guaranteed by the Small Business Administration. But they don’t lend money to businesses. The SBA offers guaranteed loans through banks and online lenders.
They have . But, they offer great rates to those who qualify.
Lines of Credit
It works like a personal line of credit. You can borrow up to the limit and repay according to the terms. It’s a flexible option for borrowing money but may have higher rates than other options.
Equipment Loans
Only looking to buy equipment for your business? You may need an equipment loan. It’s a loan with terms tied to the life span of the equipment.
With this loan, you may need to provide a down payment.
Personal Loans
If all else fails, you may look into a personal loan to finance your startup business. The rates can be higher, but it can still be a good option. Especially if you’ll net profits soon after you get started.
Business Credit Cards
The rates on a business credit card will be the highest of all the options. This is best reserved as a last resort. Or, only for small startup costs.
5. Bring the Budget to the Table
Get ready to crunch the numbers! Accounting documents support the numbers you’ve put into your business plan. Bring them to the table when you meet with your lender.
Here’s a list of accounting documents that will help your case.
- Business Balance Sheet
- Cash Flow statements
- Profit and Loss statements
These documents will show how you expect cash to flow in and out of your business. The document your expected sales and expenses on a monthly and yearly basis.
Bring every figure you’ve got to the negotiation table. You need to convince the lender that you’ve got your plan well laid and you’re ready to succeed!
Go ahead. Apply, today!
It’s difficult but not impossible. Getting a business loan comes down to preparation. Spend the time to gather the right documentation for the right loan product.
Do your homework beforehand and you’ll be set!
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