One of the first financial resources hopeful business owners look to when trying to find startup cash is a small business loan. Though these loans can be a great way to get the money you need to launch your business idea, too often, entrepreneurs get into agreements without fully understanding the process and what is required of them. Lack of knowledge when it comes to funding and financing could quickly result in a failed business. To avoid that, educate yourself with the information listed below.
You’re Considered a Risk
As a new business, lenders have no idea what your creditworthiness is. Since you haven’t produced any revenue yet, the company must “take a leap of faith” on whether they should lend you the funds. For this reason, new business owners are labeled high risk and in some cases, may have a more difficult time being approved for a loan. This risk can be lessened if you have a good personal financial standing as creditors can review your ability to repay as opposed to a business that has yet to be launched.
As stated above, you don’t have a credit history to go on. Therefore, lenders will often use your personal credit history to determine whether they should lend you funds for your small business, and if so, how much. Small business owners with poor credit will have a harder time getting approved and if they are approved, may be required to pay more in interest rates because of the high risk. If you want to increase your chances of getting approved with low-interest rates you need to clean up your credit. Get rid of negative collection accounts and start making timely payments to show your diligence in resolving your poor history.
You’ll Need a Business Plan
Lenders want to know that they’re providing money to something that will eventually generate revenue. To be approved for a small business loan, in most cases, you’ll be required to submit a detailed business plan. This should include market research to determine the need for your business and the likelihood of it succeeding.
You’ll Need Financial Documents
Like with any loan you’ll need to provide financial statements that prove you can repay the loan in full. If you haven’t started pulling in money from your business yet this will mean pulling your personal financial statements such as those from your checking and savings account. You will also need to produce financial documents such as your personal income taxes. Leaving out financial documents can hold up the decision process and even alter a lender’s decision. If you want to expedite the loan process be sure to hand in all required documents upfront.
You May Need Collateral
Depending on your creditworthiness and the lender you apply with for a small business loan you may be required to put up some form of collateral. Lenders want to know that if your business plans fall through that you still have a means to repay what is owed to them. Your collateral could be your home, car, or some other asset of equal value to the amount you’re looking to borrow.
You Will Have to Wait
If you believed that you would be able to get a small business loan in just a few short days, this is not the case. Both the application and review process takes a great deal of time and effort. Once you’ve taken the time to gather your documents and draft a detailed business plan, this information must then be reviewed by lenders. If there are any discrepancies or additional information needed, this too can delay the process. Depending on the timeline of the lender you could be looking at a wait of 2 to 3 months.
So, getting a lender to believe in your dream and fund your business until you start making money might not be as easy as you thought, but it can be done. Remember, the disadvantage you have is being a startup vs. an established business. To increase your chances of being approved for a small business loan, be sure to clean up your personal finances and present your business idea as one that will be a success. This, in turn, will lessen your risk and hopefully get you the funds you need to launch your dream.
