If you’re about to open a small business or already have, you’ll definitely want to consider financing options. Small business loans provide the necessary capital to not only start a business but also to keep it running. Many small business owners put a lot of their own savings into startup costs. While it’s important to have some equity upfront, it’s also important to remember that you’ll have many expenses in your first few years. Many new businesses take several years to turn a profit. Even the most inclusive estimates of business expenses can be thwarted by an emergency or unplanned expense. Having a safety cushion of available funds allows you to focus on running and growing your business.
How to begin the small business loan application process:
First, you’ll want to examine your credit. You can easily obtain free credit reports from the three major credit bureaus online. If you aren’t entitled to a free report, credit monitoring services provide a similar service for a small fee. If possible, you’ll want to also purchase a merged report. This consolidates all three bureaus into one report. This is what most banks will review when looking over your credit. Typically, your FICO score is the number they are most interested in. While many of us might not be thrilled with our score, it’s a tried and true indicator that’s used industry-wide. If your credit needs improvement, it’s always best to try to resolve whatever you can right away. If you’re unable to make any significant progress, credit repair agencies may be able to help. For a fee, they will challenge items on your credit report. Many times, they’re successful at removing old and inaccurate information. If you have the time and resources, you can also dispute items directly with the credit bureaus themselves, for free.
Once you’ve improved your credit to a level that you feel comfortable with, you’ll want to examine the remainder of your finances. Assets and liabilities should be calculated to determine your net worth. Also, you may want to consider what could be used as collateral if requested by the finance company. Real estate, vehicles, and retirement accounts are often used to secure financing. Also, consider how much money you want to put into the business upfront. Some companies will require that you have a certain percentage of equity invested prior to approval. After you’ve come up with your calculations, you’ll be ready to apply.
Be certain to have a strong business plan prepared, first.
A strong business plan can make the difference between being approved for a loan or not. If you don’t already have one prepared, you’ll need to take this step before applying. If you’re uncertain as to how to write one, you can research the topic online. If you’re not the best writer, you can typically hire a consultant or author who has the experience to write one for you. It’s critical that you review and study the plan thoroughly. You’ll most likely be asked many questions and need to provide quick and clear answers. Taking the time to become confident with your plan will pay off significantly. It may also give you new ideas and help you to remember things that you may have forgotten to account for. It’s also helpful to have a presentation prepared with as much visual detail as possible. The more a lender can envision your business succeeding, the better.
Small Business Administration loans work for some borrowers.
An SBA loan is the typical loan that most people have heard of. These loans are government-backed, so they’re for the “cookie cutter” borrower with good credit, assets, and a strong business plan. They are typically processed by a local bank so they have the benefit of being close by. The interest rates and loan terms are also among the best available. These loans are typically not recommended for those who have credit scores of under 600, or have very limited assets. The bank will want you to demonstrate that you’re financially stable and could carry the loan on your own, even if the business were to close.
Other options are also available:
Venture capital and private equity firms have become more popular in recent years. These companies offer to provide funds for partial ownership in your company. They place more of an emphasis on the business plan than anything else. The benefit to the borrower is that the repayment terms, if any, are typically much laxer. The drawback is that with ownership comes some level of control. The investor will most likely have some oversight and involvement in the operations of your company. Since these deals are always contract based, seeking an attorney’s advice is highly recommended. Attorneys are also skilled negotiators. They may be able to get you a better deal than what was offered. It’s well worth the upfront investment to ensure future peace and happiness.
Merchant invoice factoring and credit advances are also relatively new concepts in lending. With these loans, the amount is based on the company’s receivables. These are convenient for companies who are already making sales but need immediate cash. The underwriting guidelines are simple and they provide fast funding. For the convenience factor, there may be significant interest and fees attached to these services.
Business lines of credit are similar to home equity lines of credit. The business applies for the loan and uses its established credit history and assets to qualify. The underwriting is done upfront and a line of credit is determined. The business can draw on the line of credit whenever they need the funds. Usually, the entire loan plus interest must be paid on the full line of credit regardless of what’s actually been used. This is a good option for established businesses that occasionally have cash flow irregularities.
Determining what type of loan works best for your new or existing business shouldn’t be too difficult. Many other resources are available online. Getting a small business loan could save the day and make running your new business much easier with the peace of mind they provide.