For many small business owners, starting a small business means generating outside capital in addition to personal investment. Although certainly achievable, prospective small business owners shouldn’t go into the loan application process without going through the proper preparation. Receiving a loan often means doing some degree of research as well as meticulous organization and conceptualizing a coherent vision for the future.
Research local banks to rule out those who don’t specialize in your field
It’s important to understand that not all banks are the same. While some might cater specifically to budding entrepreneurs looking for a financial starting block, others may not offer business loans at all.
At a finer level, some financial institutions might offer loans only in specific areas of business while excluding others. Similarly, some may offer loans only to those businesses operating in a particular stage of the business cycle. These kinds of banks typically give loans to established businesses and exclude startups to mitigate risk but it’s best to look into such policies to make sure this is the case.
One of the key considerations to look for when “shopping” for banks is industry relevancy. If you’re confident in your proposal, focus on institutions that have partnered with similar businesses. Not only are these institutions typically more interested in businesses like yours, but will also have be better able to offer advice about your industry when specific financial questions arise.
Be fully prepared to explain your business proposition
Bankers rely completely on you to articulate your plan and vision for the company’s future. While confidence in your organization’s success should certainly characterize your overall presentation, bankers will not buy into lofty idealism without seeing a substantial financial plan fueling your optimism. Keep your plan practical and realistic––don’t overstate your goals.
A good way to keep your proposition within practical limits is to frame your plan around why consumers and other companies will be compelled to do business with you. A sensible way to get all of these ideas across at once is to lay out your best case business scenario along with the most likely one.
Formulate at least two ways to make good on your obligations to the bank
Along with establishing a viable business model for your short and long term future, the second big concern among banks considering a loan is the method of repayment. Typically, banks will be looking for two possible repayment sources. It’s up to you to formulate what these sources will be. Don’t rely on bankers to hold your hand and guide you toward a solution. This is your chance to convey a solid understanding of financial responsibility and planning.
If you’re struggling to put together a secondary plan, consider a pledge of collateral either business-related or personal. In addition, you could also establish a loan guarantee agreement among the owners or suppliers to reassure the bank their investment will be promptly repaid when due.
Get assistance from the Small Business Association if you’re struggling to formulate a proposal
The Small Business Association (SBA) can be a great financial resource for small businesses looking for extra assistance. In addition to providing government-backed loans through banks or credit unions, they also counsel small business owners primarily during the loan agreement process.
Although the SBA only provides direct loans and grants when assisting with disaster recovery, the programs offered through other banks can sometimes give eligible businesses longer repayment agreements as well as opportunities for businesses with bad credit to receive loans in the first place. If a potential lender is proposing a repayment plan too steep for your business to confidently enter into, these sorts of assistance programs can offer extra relief.
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