While bootstrapping your startup is the in thing in some crowds, for many businesses, loans are a key element of corporate funding. Whether a business is looking for financing to expand its inventory, open a new location, or fund a new product line, loans can be the key to building a strong, vibrant business.
But how does a company go about getting a small business loan?
Identify A Lender
The first step in getting a loan for your small business is to identify who will be the best lender for your business. Companies can choose from local banks, national banks, credit unions, and other, specialized lenders.
Depending on the age of the business, the demographics of the CEO and owners, and the current income status of the business, it might be easier or harder for the company to get the loan it needs. The Small Business Administration can help companies identify lenders who will be able to meet the needs of small businesses.
Identify A Loan Product
Each small business lender you consider will probably offer a wide variety of loan products. Just like when you look for a loan for your personal life, choosing the right loan product can make a big difference in how much you have to pay back over time.
If you are looking for a loan to cover day-to-day operations, you will be looking for a very different type of loan than if you are growing your business or looking for a safety cushion. Being clear about what sort of loan you need will help you research lenders more effectively.
Craft a Business Plan
Financial lenders want to see that your business is a good investment risk with their loan. The way you show them that your company is prepared to use the loan to good measure is a business plan. Whether your company is just getting off the ground, or the loan will be used to finance an expansion, this plan will show the lender where their money will be used, and give them a chance to evaluate their risks.
Your plan will help them understand the audience your company is approaching, the marketing decision you’ve already made, and what problem your service or product will solve.
Be Clear and Explicit
When you meet with your potential lender, have a clear and easy to understand explanation ready as to why your business needs the funds, and what you plan to do with them once granted. Show clearly how the loan will allow your business to expand, and what that will do to your bottom line.
Be prepared with market research and demographic information, as well as any other evidence you have that your risk is the right one to take.
Understand How Banks Determine Loan Eligibility
Those seeking loans often joke that banks only want to loan money to those who don’t need it. When you are trying to get a loan for your business, it can certainly seem like that statement is true. Knowing which factors banks and lenders look at to determine loan eligibility can help you determine the best lenders to approach.
For example, if you have a good credit score, and your business has been around and profitable for a few years, a bank is a great place to get started. If your business is brand new and your personal credit is poor, you might need to visit an online lender to get the capital you need to keep your business dreams afloat.
Gather Your Documents
When you apply for a business loan, you will need to submit a number of different financial documents so that the lender can make a final decision on your loan eligibility. These documents will vary based on the lender, but could include:
- Tax returns
- Financial records
- Bank statements
- Legal documents for your business
It is important to note that lenders may request these items for both personal and business finances. It may seem odd that banks ask for personal financial information, but for many new businesses, personal finances offer a clearer picture of whether the borrower will be able to repay the loan over time.
While many new entrepreneurs struggle to get adequate capital in the marketplace, especially minorities and women, banks and other lenders are beginning to show more willingness to expand their lending pool to include a more diverse pool of people. Don’t assume that because you are a woman or a person of color you won’t be able to acquire a good loan from a prominent bank. Talk to mentors about which banks have a good reputation for entrepreneurs in your position, and discover the best way to move forward.
What have you found to be the easiest way to get a small business loan?
