Personal loans are widely available, but if you are trying to borrow a small business, you will find that the process is more difficult.
If you are considering borrowing to start or grow your business, start and get organized long before you fill out an application. Borrowers want to be sure that they will be repaid, which means that they are looking for several criteria.
Good business sense
Borrowers just want to make a loan that helps you grow your business. You may be sure that the money will help, but you have to convince them of that fact. To do this, make a hierarchical case that proves (without exaggeration) how the funds will lead to greater profits – and income that you can use to repay the loan.
Your business plan is necessary to get approved for a loan. If you don’t have one yet, it’s time to make one. You have to show, with certain numbers, how you will make money, how you will spend it, and your big-picture strategy.
Explain who all the players in your business are, especially the management, marketing, and sales roles – these individuals will bring in new business that helps pay off the loan.
It’s okay if you do all these jobs – just explain why it’s your success in those areas as well. Your business plan should also include basic financial statements, pro forma statements, and information about your personal resources.
Building the Foundation
Here is a frustrating fact about most small business loans: your personal finances are important.
Banks want to see a history of successful borrowing anytime they lend. This includes credits for your business. Unfortunately, many businesses do not have a history of borrowing (especially new businesses), so lenders look at your personal results. If you have good credit, it is a good sign that you will do well with business loans.
If you have bad credit, lenders will be much weaker in terms of lending. If your credit is “thin” because you haven’t borrowed much in the past (or if you need some repair), you may need to build a loan before your creditors are likely to grant you a loan.
However, borrowers will almost always want to hold you personally responsible for the loan. If they don’t and the business fails, there is no one left to repay them. However, if you are personally guaranteeing a loan (which is most likely a requirement), they can go after you personally, and your personal loan will suffer if you are not paying off.
If you have a collateral loan, you are more likely to get approved. With some businesses, you may be able to lease business assets such as vehicles and equipment (if your business has those types of assets).
You are more likely to have to pledge personal property such as your home or your financial accounts.
Where to lend
Once you are organized and know what to expect, it’s time to start talking to your lenders. You have several options for borrowing, and each option comes with pros and cons. For best results, talk to lenders to understand their requirements and how they work – don’t just fill out an application and hope for a “yes.”
Banks and credit unions are traditional sources of small business lending, and they are a good place to start. Especially with small institutions, you will be able to meet with a lender who can guide you through the process. Larger banks might have access to hands. To improve your chances of getting approved, ask for SBA loans, which reduce bank risk and show interest rates.
The lending process with banks and credit unions can be slow, so be prepared for a long process with a thorough review from the bank.