To bring your small business aspirations to life, you’ll require a suitable way to finance your business. Establishing and operating your own small business necessitates sufficient funds to commence operations on day one and, eventually, to generate profits. Small businesses come in a diverse range of types, with each one being unique in its own way.
However, one common thread that binds them all is the need for adequate funding. Do you need a business loan? Should you opt for a traditional loan, seek out a credit union, or explore online rates? What differentiates these options? We will provide you with a comprehensive overview of the various methods to finance your business.
Armed with the appropriate knowledge, planning, and preparation, you’ll be prepared to take the essential steps to obtain and secure the optimal funding for your small business.
You Need a Business Plan
The very first step of exploring ways to finance a business is planning how to do so. All new businesses, from one-person online shops to multi-employee large corporations, need to begin with a clearly drafted, thorough business plan.
The reality is that your business is not going to get funding from either a lender or investor unless you have a business plan to show to prospective lenders or investors. Prospective lenders or investors will need to see that they will be paid back. Investors will need to see that the capital they sunk into your business will grow over time.
1. WHY DO PROSPECTIVE LENDERS NEED YOUR BUSINESS PLAN?
Your business plan allows you to articulate and examine:
- Company’s entrepreneurial goals
- Business’s projected finances
- Business’s plans for future growth and expansion
Preparing your business plan allows you to manipulate the figures on paper so that you can mentally plan ahead to avoid problems and take advantage of opportunities.
A business plan can be presented to potential investors or prospective lenders as evidence that your company is worthy of funding, thus helping your business clinch that loan. Preparing a written business plan demonstrates to potential lenders that your business idea makes sense and that the numbers add up.
2. CRUNCH THE NUMBERS TO PROJECT YOUR BUSINESS NEEDS
Your business plan can serve as a financial roadmap for internal use. Use a business plan to show how you’re going to use your loan or investment funds to their maximum potential.
Your business plan allows you to project the funding that you will need. You can also figure out how to best optimize that funding for a maximum return on investment. Also, your financial roadmap lays out how you plan to use the financing money.
3. LENDERS WILL LOOK CLOSELY AT YOUR BUSINESS PLAN’S SALES PROJECTIONS
At the end of the day, your business will only be profitable if it is able to make sales. One of the most important things investors will focus on in your business plan is your business’s future sales projections.
Your business plan’s sales projections should include all costs, allocation of resources, as well as data on how financially feasible your business idea is. Preparing and examining prospective sales figures will show whether the business will sink or swim during the all-important start-up phase.
For more on how to prepare a business plan to finance a business, visit our resource Business Plans 101.
For more on the financial components of a business plan visit our resource Business Plan Section 7: Financial Information.
Steps to Help You Get Your First Small Business Loan
Now that you’ve prepared your written business plan and examined whether the numbers make sense, it’s time for you to use that plan to help you secure a loan for your company.
The bottom line: You can’t start a business without enough money. Most small businesses are funded by loans, either partially or fully. Taking out a loan requires you to prepare the proper documentation.
So how do you actually get a small business loan? Here are the basic tips to know to take you from pending application to quick approval:
1. TO GET A BUSINESS LOAN YOU’LL NEED TO PREPARE PROPER DOCUMENTATION
- Prepare proper documentation for the loan application.
- Check with the prospective lender on what they need from you.
- Be honest with your answers on the application.
- Be accurate with your numbers and projections.
- Answer all the questions completely.
- Don’t overestimate your business’s potential profits.
- Don’t underestimate your business’s anticipated expenses.
- Also, don’t apply to borrow more money than you can reasonably pay back.
These tips are simply a broad overview of a complex process. For more detailed information on how to secure your first business loan, visit our resource Behind Closed Doors — Behind the Loan Application Process.
2. REVIEW SBA MATERIALS AND RESOURCES ON LOAN APPLICATIONS
The Small Business Administration (SBA) is a federal organization that was created to help small businesses and their owners realize their entrepreneurial dreams. A goal of the SBA is to provide aspiring and existing entrepreneurs with the training, tools, and resources they need to get their businesses off the ground, and then how turn them into profit-making successful ventures.
The SBA is full of resources on how to apply for and secure your first business loan. Visit SBA.gov for interactive, up-to-date information on the small business lending landscape. Your business may qualify for special programs and rates, depending on who owns the company and what industry you’re in.
3. CONSIDER THE VARIOUS LOANS AVAILABLE TO SMALL BUSINESSES
The SBA can help you prepare your small business loan application, but it can also help you find out about competitive rates and special loan programs. Visit SBA.gov for more info on which programs may exist.
Traditional Bank Loans for Applicants With Good Credit
Traditional bank loans afford entrepreneurs with favorable credit scores and credit history the chance to finance a business from a traditional lending institution.
Loans from traditional lenders may vary in terms of duration and monthly payment amounts, so you’ll want to be cognizant of the amount of interest charged over the life of the loan. It’s crucial to make payments on time, or else your credit will be harmed.
Business owners with no credit or poor credit scores may still qualify for a traditional bank loan if they apply with a co-signer. A loan co-signer pledges to make the loan payments if you cannot, which can help you qualify for loan approval if you cannot do so on your own.
Some banks also consider the matter of collateral for a traditional loan. Collateral is when valuable tangible personal property is proffered by the lender to secure the loan. If the lender fails to make payment on the loan, the bank will seize the property and sell it to pay for the overdue balance on the loan. Some business owners use their homes as collateral for a business loan, though that option is not without significant risk.
For more on securing a traditional business loan, visit How Do I Get a Business Loan?
Microlenders Are More Flexible With Approval
Microlenders offer small business owners a way to finance a business that differs from traditional banks. Microlenders’ lending criteria are generally more flexible when it comes to approving candidates who may not qualify for traditional bank loans due to a lack of credit or poor credit history.
The distinction between a traditional bank and a microlender is that a microlender take a holistic approach to the lending process. Rather than a traditional bank, which focuses on facts and numbers, a microlender will often take a more personal approach to lend when reviewing loan applications and making decisions on candidates.
Are microlenders the right way to bankroll your business?
Accion Opportunity Fund says, “In the spirit of promoting entrepreneurship, some private companies and non-profits offer small loans of up to $50,000 for individuals and businesses that may not otherwise qualify for a bank loan. Called microloans, these small, short-term loans feature lower interest rates than some other alternative financing options and are typically extended to startup companies or self-employed individuals.”
In order to make a lending decision, a microlender will look at the whole picture of the company, the story behind the company, and the people involved. Microlenders also provide a secondary benefit of education and training for those they approve so that the business owners can make the best use of the funding they receive.
Microloans can be used for a wide variety of business needs:
Working capital
Purchasing needs—such as inventory, equipment, or other tangible assets
Marketing
Advertising
Paying down existing business debt
Growing or expanding current business operations
Purchasing an existing business
Payroll or hiring needs
Leasing office space
Buying office space
To learn more about microloans visit Is a Microloan Right for Me?