A major piece of the startup business puzzle are the finances, and while some small business are a huge success from the outset, nearly all businesses start with some type of loan…whether that’s personal, crowdfunding, or the traditional small business loan from a bank.
Today, we’re going to focus on that last one, the small business loan. Whether you’re buying equipment, employees, building space, etc. the small business loan may be necessary to launch your company. The problem is, this may be the first loan you’ve taken out, and you want to make sure you do it right!
In their article for Forbes.com, Aileron gives us a set of seven steps in effectively landing a business loan that will do what we need it to. (article link: www.forbes.com/sites/aileron/2014/10/02/7-steps-to-getting-a-business-loan)
To begin with, if it’s not too late, build a relationship between the lenders and the key financial decision makers for your company well before you need to get a loan. A lender is far more reasonable and willing to work with you/your company if there is a personal connection, rather than simply stepping into a bank and asking them for a large bundle of cash.
You also need to establish what the money will be for. This is important for determining if it is a good investment or a bad investment. Good investments, as explained by Aileron, are for costs associated with new equipment, real estate, longterm software development, or if you have large sale variances…these have a return for the money invested. Bad investments would be for costs such as covering ongoing losses, office build outs, or non-essential business assets.
Knowing what the money is for will also help you establish how much money you need, which is the big questions. Asking for too little can result in financial stress further down the road, and asking for more later on can be a difficult process. That being said, asking for too much from the outset can make lenders wary, question your rationale, credibility and overall trustworthiness.
Develop a well-thought-out budget, and be honest with everything…don’t over or under commit to price tags.
There is also the entity of the personal credit score that can influence the chances a lender will commit to financing your small business. They may look at your personal credit score, your debt-to-income ratio, time in the business, as well as reports on industry risk. Make sure you know what your potential lenders require before wasting your time somewhere that has a small chance of granting you the loan.
Finally, the last few points Aileron gives us is to make sure you know what type of loan you’re looking for (small business, region specific, big business, micro-loans, etc.), and which companies have the best reputations for lending.
Even before visiting the lender, make sure you have all the necessary paperwork ready to go. This will expedite the process. You will most likely need the following:
– A business plan, including business owners’ resumes.
– Expected Financial impact and projections
– Personal finance information, including tax returns for three years prior
Finally, the last step is to be patient; it can take anywhere from 2 – 4 weeks to get loan approval, and will most likely require further documentation and information on the financial background, both personal and for the business.
So if you haven’t been scared off yet, use this guideline as a resource for getting the ball rolling on the small business loan process! This article should give you a leg-up on some of the competition, and get you set off on the right foot.
If you have gotten a loan, we would love to hear what the experience was like, how it differed from the list here, and what you would recommend for those who are at the decision making moment!