Every business – small or big needs capital. A business’ capital needs can be satisfied by multiple ways. They can go for an angel investor, private equity, or debt. But in this article, we focus on small businesses.
For small businesses, the risk of getting capital is higher, and they have to work more to get it. Small entrepreneurs run small businesses, and a perfect example is a mom n pop shop. They cannot go in for private equity. So, one of the easiest ways for them to get capital is to apply for a small business loan. It will provide one of the resources needed to grow a business.
However, applying for a small business loan isn’t that easy. Below are four pain points.
Thinking and needing
There may be a difference between what a business owner thinks he needs and actually needs. A small business owner can claim they need “x” amount, but they may actually need “y.” This can raise suspicion that they aren’t aware of the real state of their business. This is a large red flag for any lender. Owners have to make sure that the amount they ask for is real, and they prove it well.
To prove that the ask is real, they will have to go through historical trends and make reasonable projections. If the owner needs a machine to increase production and then he needs to calculate to show that his needs are concrete.
There has to be a financial projection that shows how the money injection can increase the capacity and how it can help pay the loan. Owners must show as much data as possible to show that the amount they have asked for is reasonable, and it will help in the loan repayment.
The owner has to be aggressive and cannot hesitate to ask for a large amount if the business needs it. In case you ask for a small amount and then need more, then the lender cannot give more unless the prior loan is settled. Owners can also find an accountant or a financial advisor to guide you in the loan application exercise.
Finding the right lender for a small business loan is important. Owners must try to cultivate a relationship with lenders before a need arises.
Owners can start at the local banks to check if they offer small business loans. You can ask to speak to their representatives and show interest in learning about their lending process. If there isn’t a ban for this, then focus on community referrals. Ask for referrals to other lending organizations that can help you. The Community Development Financial Institutions and Small Business Administration are good sources for small loans.
Owners have to be proactive, reaching out to lenders, and creating foundations for positive relationships with lenders. Don’t wait till the last minute to reach out to lenders. Do the legwork earlier. Lenders are always looking out to talk to potential customers. So, reach out even if you don’t immediately need a loan.
Small business owners must have the right attitude while getting loans. There will be some back and forth before the loan application finally goes through, and owners have to be prepared. Set the timelines keeping this in mind.
Do not be fickle and take the same loan application with the same story to someone else and think that it will work. Listen carefully to a lender’s reasoning as to why they cannot give you a loan at this time. Use that information to work on your position and application. It may be that your credit score needs to be boosted, so do that before applying again. Work in the right way to get the loan amount.
If a small business owner applies for a loan, there will be multiple documents required before the application is complete. All prospective lenders will ask for income statements and balance sheets. Applicants must also disclose any financial standing that can affect his/her ability to take debt or to put up collateral.
After the documents are submitted, the lenders will work hard to give you an answer soon. But understand that it may take time to go through the application carefully. They are making sure you can pay back the borrowed amount.
Good documentation can make this process faster. If an owner cannot get his financial statements ready in a timely manner, then the lenders can think that he/she isn’t up to date on their finances, and this may be a negative against the owner.
Capital is the lifeblood of any business, and all business needs it. However, the pain points mentioned above in the application can be tackled if it’s done properly.