No matter the size, positioning, or current state of your business, finding a business loan is difficult. When you’re an online startup or are just putting the finishing touches on your business plan, lenders can be hesitant about loaning money out because of the risk involved. If you’re looking to attain a small business loan, here are 3 tips to help you in your search.
Look at Small Banks
When looking for small business loans, some startups and small businesses are turning to small banks. Biz2Credit found that in June 2011, big banks approved 8.9 percent of small business loan applications compared with small banks which approved 45.5 percent. If your startup is based locally, choosing a local bank in your area could mean a greater chance on a loan approval.
- Make sure that the bank you open your business checking account with is startup, and small business, friendly and is comfortable working with the U.S. Small Business Administration (SBA) loan system
- Relationship managers at community-based banks often have more discretion than those at a larger bank and may consider small-business lending to be their specialty.
- Small banks are often praised for offering better customer service along with quick response times. If you enjoy a more personal approach from your lender who understands your market, a local, smaller bank may be the way to go.
Consider an SBA Loan
The SBA offers a number of loan programs for small businesses that your startup can qualify for. While these are under SBA jurisdiction in the big picture, you’ll need to have a working relationship with a loan officer at your local bank, credit union or nonprofit financial intermediary to access the programs. According to Entrepreneur.com, the three most popular and startup friendly loan programs currently offered are:
- 7(a) Loan Program: With this program, you can get up to $750,000 from a local 7(a) lender. There are subdivisions of 7(a) depending on how much your lender decides you need. In order to qualify, you may need 2-3 years of financial statements related to your business. While the loan amount is high, it is often difficult for a brand new startup in the early phases to find approval.
- 504 Loan Program: The 504 loan program is restricted to small business and is intended to supply funds for asset purchases, such as land or equipment. This loan program reduces the risk for the primary lender as the certified development company (CDC) and the SBA. Keep in mind that this program tends to exclude most service businesses that need to purchase land or equipment.
- 7(m) Microloan Program: With this loan program, funds come directly from the SBA, not a local lender. This program intends to provide loans up to $35,000 with the average ranging around $10,000. Perhaps the most startup friendly, the only potential drawback is that Microloan borrowers typically have to enroll in technical assistance classes administered by the micro-lender intermediaries.
Preparation is key when it comes to getting a loan for your startup business. Once you have decided upon a bank and perhaps a loan or two that you want to go after, you need to be prepared for your meeting with a lender. There are a few things you’ll want to have handy.
- A record of your personal credit history. If your business hasn’t been operating for very long, banks and lenders want to know how you maintain your personal finances as they often assume you’ll manage your startups finances in a similar matter. Show them you’re responsible and take accountability.
- Financial statements for your business. You’ll have to show the current state of your business’s finances. Lenders want to see how much money your startup is worth and how much money you’re dealing with. You’ll also want to prepare detailed pro-forma statements to give projections about what your business will be worth going forward.
- An updated business plan. Having a detailed business plan readily available will indicate to your lender that you’re serious about the success of your startup and have the strategy planned out. Include bios of you and your partners, your track record, strategies, advantages, etc.
Finding a loan, and actually getting it, is challenging for startups. Being prepared with a detailed business plan, current financial statements, and seeking out a bank or lender who works with the SBA loan system is how your startup can increase its chances of getting the loan it needs to become a more successful business.