If you’ve considered opening a small business, you’ve taken a big first step. Small business owners enjoy the freedom of doing something they love for a living. Providing a valuable service or product is a noble effort. A small business loan is often one of the first tasks in establishing or growing your business. This informative article will provide you with information on how to obtain a small business loan. Some available options will also be reviewed.
Creating a business plan is essential:
If you’ve already created a business plan, you’re ahead of the game. If so, have a peer or expert in the business review it for you. When applying for a loan, you’ll have to be able to clearly articulate how the plan will play out. It’s also good to provide some visual representations to bring your ideas alive. If you have yet to create a plan, there’s a wealth of resources available to help. Online courses, videos, books, and even courses at local libraries are often resources that are available. If writing isn’t your forte, there are consultants and professional writers that can help. It’s important that you specify exactly what you’re looking for to avoid confusion and additional work. Once you have your business plan, you’ll want to prepare a presentation and anticipate any questions that may arise. Lenders will often go over the plan with a fine tooth comb. Being prepared can make the difference between an approval and a denial.
Reviewing your credit is strongly recommended:
If you’ve ever applied for a mortgage, you know firsthand how intense the loan process can be. The lender is taking a significant risk by investing in an idea and you as a business owner. They must feel confident that you’ll be able to perform up to expectations to eventually make a profit. Your personal credit will be one of the first things they’ll review. While your credit isn’t the sole indicator as to how you’ll perform, it’s a strong indicator as to how you’ll handle the business’s finances. If you have credit issues, you’ll want to fix them before applying. If you’re unable to fix them, you should consider hiring a credit repair company to help. While there are options available for those with poor credit, it’s always to your advantage to fix it to open up more options.
Small Business Administration loans are a great tool for conventional borrowers:
The SBA provides economic opportunities for many people every day. Their small business loans are the backbone of many companies. They also provide grants and incentives for those who are in need and demographically challenged. The SBA loan process is a thorough and conventional one, however. For those who have strong credit scores, assets, and a solid business plan, these are great loans. For those who are credit challenged without significant compensating factors may find difficulty in obtaining an SBA loan. Banks provide these loans and are eager to do so because they’re backed by the federal government. This significantly reduces the risk to the lender. Conventional underwriting guidelines must be observed and tend to be more rigid than with other types of loans.
For those who are credit challenged:
If you have poor credit, there are still other options available. Venture capital and private equity firms have grown in recent years. They’ll invest a significant amount of money into your business for partial ownership and control. This means that the business plan is a key factor in getting approved. It’s almost certain that they’ll require an in-person and thorough interview. Often times, this is with an entire panel of executives who’ll discuss your plans. They’ll ask lots of questions and expect good answers. Confidence is half the battle in getting approved with these firms. Also, a contract will outline the terms of the agreement, so you’ll need to hire a lawyer to review it. Since partial control is assumed, the owner must occasionally yield to the investor’s wishes, whether they agree with them or not. This is a great option for those who are willing to give a little in hopes of big returns.
Options for existing businesses:
If you’ve already opened your business but need funding, you’ll have even more options. A business line of credit is a popular choice for businesses that experience cyclical slumps or cash flow issues. The underwriting is conducted prior to approval and the owner can withdraw funds in a hurry. This can be a huge benefit for many small businesses, where events can happen quickly. The interest rates and terms also tend to be better than other alternative loan products. However, the entire interest amount must be paid even if the money is never used. Regardless, the convenience and cost savings factor tends to outweigh the interest charges for most small business owners.
Invoice factoring is a relatively new concept in business lending. With these loans, the outstanding receivables balance is used to secure the loan and determine the loan amount. The company will typically have to provide some evidence of a good receivables history. However, the underwriting times and quick funding provides a significant advantage over a conventional loan. Since the business’s credit is used to qualify, it also takes some stress off of the owner’s shoulders.
Merchant credit advances are very similar to invoice factoring. A cash advance is provided on processed credit transactions. While this is a convenient option that has very little underwriting criteria, it can be one of the more expensive options. The loan amount and fees are simply reduced from the amount that is paid out to the merchant normally.
After all is said and done:
After you’ve gotten the loan you’ve been waiting for, you’ll have to keep on top of the payments. This will establish and improve your business credit rating.