Whether you’re starting a new business or expanding an existing one, chances are you’re in need of some financing. While finding a bank or financial institute to back you can be difficult in these tough economic times, it’s not impossible. Here are six steps to help you get started.
Step 1: Obtain a Copy of Your Credit Report
Knowing your credit score is not enough. You need to go over your credit report from top to bottom to ensure that it’s accurate. Get a report from each of the three big agencies – Equifax, TransUnion, and Experian – and correct anything that may be in error. Be prepared to explain any anomalies to the loan officer, as they will no doubt be reviewing your credit report at the same time as your loan application.
Step 2: Gather Essential Financial Documents
Your lender will want to see documentation around the state of your financial affairs. You will need to provide complete financial statements, both business and personal, including balance sheets, income statements, and reconciliations of your net worth. At a minimum, you will need:
- A recent financial statement, no more than 2 to 3 months old;
- Financial statements for the last 3 years;
- Your debt schedule for any pre-existing loans;
- Accounts payable and accounts receivable for the past 3 to 6 months.
Step 3: Put Together a Strong, Detailed Business Plan
If you are just starting out, you will need a detailed business plan including your mission statement, a description of your product or service and how you will differentiate it from the competition, market analysis information, a description and bios of your management team, marketing plans, analysis of strengths and weaknesses, a cash flow statement, and revenue projections.
If you are expanding a business, you’ll need to create a projection of future operations in order to show how the expansion will increase your revenue and cash flow. Find a pre-formatted 12-month profit and loss worksheet to work with to ensure you are using industry standards.
Step 4: Determine the Type of Loan You Need
There are many different types of loans that are appropriate for a variety of different purposes. Some things to consider are collateral, interest rates, and term of investment. Your needs, preferences, credit history, and collateral will determine what type of loan you should look for.
Line of Credit. Many businesses use a line of credit as working capital in order to manage cash flow, as revenues and expenses tend to fluctuate. With a line of credit, you only need to borrow the amount that you need, so that you don’t accrue interest unnecessarily.
Business loans. Like a personal loan or a mortgage, a business loan is a term loan with a fixed interest rate and monthly payments over a set term. With a business loan, you’ll receive a large sum of cash up front, which you can use to start or expand your business.
Commercial loans. If your business owns any commercial real estate, a commercial loan is an option for you. Much like a home equity loan, you can use a commercial loan to borrow against the equity in your business real estate. This is usually an easier loan to get approved, depending on your property and the amount of equity you have built up.
Equipment loans. If you need a loan in order to purchase new equipment, such as vehicles,
production or manufacturing machinery, or farm equipment, you may want to apply for an equipment loan or leasing program. Like a business loan, an equipment loan offers a fixed interest rate and payment plan.
Small Business Association loans. Federal, state, and local governments offer a wide range of financing programs specifically designed to help small businesses. These programs include low-interest loans, venture capital, and scientific and economic development grants. SBA-guaranteed loans have lower down payments and longer repayment terms than most conventional bank loans, and can be used for business acquisitions, working capital, equipment, or owner-occupied real estate.
Federal or state grants. Small business grants are funding that does not need to be repaid, as they are funded by taxpayer dollars and awarded through a complex legislative process. Unfortunately, they are limited and harder to secure than loans, but it’s worth checking out www.grants.gov to see if you qualify for a small business grant.
Step 5: Select a Lending Institution
Although experts still contend that a bank loan is best, there are alternate methods of securing a small business loan, including many Internet lending sites like OnDeck.com. In securing a small business loan, the best place to start is the Small Business Association. The SBA can direct you to services that are specifically interested in lending to small businesses, whether you apply for a SBA-guaranteed loan or not.
Step 6: Apply, Apply, Apply – Then Apply Some More
Many small business owners typically apply at three or four banks and then give up. Don’t! Somewhere out there is the bank or lending institution that is ready to invest in your business. Banks may decline your loan for a variety of reasons, many of which have more to do with them than you. Be persistent and keep searching.
If your application is rejected at one bank, query the loan officer as to why. There may be things that you need to change or explain more fully to make your application more complete. Banks are looking for past profitability and a good solid plan for future revenue. If you aren’t currently making a profit, you should be able to show how you will change that in the near term.
Try keeping your loan requests small at first. By securing and paying back a small loan, the trust you will build with the institution will help you secure a larger loan later on.