For developing entrepreneurs, one of the most pertinent obstacles encountered when starting a small business is obtaining the funds. Money is always a major concern for those who desire to be successful throughout the ups and downs of business. When applying for a business loan, there are a few things to consider:
Fitting the Criteria
Depending on which bank you are using to apply for a loan, there are several staple criterion they may consider. Here are a few things they may look for when reviewing your application for a small business loan:
- The purpose behind it. For a loan guaranteed by the Small Business Administration (“SBA”), this could include how you will use the loan proceeds, the size of the business, and the type of business dealings you will be associated with. Unsound business practices such as lending, pyramid sales, and gambling will not qualify for a loan in almost all cases.
- How able you are to pay back the loan. Banks strongly prefer that the loan be fully secured, however this may not be a make-or-break factor. Providing strong collateral through personal and business assets as well as holding personal investments in the business may prove your capacity to return on investment.
- Character and experience. Providing a favorable and stable credit history both personally and within your business may reflect a responsible and accountable attitude.
Providing the Proper Information
There are going to be a least a few necessary documents when going in for a loan. Although this may vary depending on the bank, obtain these basic documents to be the most prepared:
- A clear and detailed business plan. This may include personal information such as past education, employment, experience, and all other information relevant to your business.
- A credit history of all present and previous businesses as well as personal history of all partners.
- Financial statements (past, present, and projected). Includes both personal and those of owned and shared businesses.
- Projections of income for 1 to up to 5 years.
- Personal guarantee of all business owners.
- All legal documents pertaining to your business (copies of contracts with third parties, franchise agreements, commercial leases). Gulati Law can help you through this process.
Begin the Process Wisely
Before going into the bank and asking for a loan, there are a few basic steps to take to educate you on how to go about the process. This means doing your research.
- Choosing which lending institution benefits you the most. The smaller the business (especially in start-up phase), the less likely a large bank will grant your loan request. Small businesses tend to be less profitable for them, yet require the same amount of servicing and underwriting.
- Speak with other small business owners that you trust. Chances are many people starting out with their own businesses have gone through the same steps you are now preparing for. Getting honest advice could prepare you for any unexpected obstacles and lead you in the right direction.
- Approach your current lending institution or ones you have worked with in the past. They may be more willing to work with you one on one and provide helpful tips and information.
- Look into local community banks and credit unions. These smaller lending institutions frequently get overlooked and may offer a better option for your business.
- Speak with your legal counsel, they may be able to connect you with resources you were unaware of.
Source: Small Business Administration