A small business start-up will seldom have all the money needed to start, operate, and sustain the business through the tough first year of business. Most small business owners will be seeking money.
While recent times have seen some other sources for raising money, such as crowdfunding, peer-to-peer funding, and instant online loans, business financial institution lending is still the most sought-after choice for small business start-ups or those small businesses who require money to grow. And lending by the Small Business Administration (SBA) is at the highest levels.
While it is recommended that small business owners use every available resource to raise funds needed to start or grow their business, they should also know what top business financial institution lenders expect to see when considering a loan to a new or growing business. Here are the five ways to ensure a small business loan.
You Must Become Credit Worthy
Before you step foot into a business financial establishment looking for a loan to start a small business, you need to take care of any adverse or inaccurate credit score problems on your credit report. You also need to solve tax issues or previous business matters that could label you a lending risk.
Anything such as tax or credit liens, garnishments, damaging financial institution transactions, or owing back taxes can all be risk red flags for a possible lender, so you must have all of these issues solved, or looking for a loan will be a waste of everyone’s time. There are many ways to overhaul negative financial issues you have gotten into, and you must use them before you secure a loan for your small business.
You Must Create a Strong Business Plan
The top business financial lenders say that a well-written and accurate business plan is vital to a positive answer to your loan request. Your business plan is a representation of your genuine understanding of how your business will function. Still, it shows you have thought out what you are getting yourself into and how to handle all the aspects required to run a successful business.
Your business plan should incorporate financial projections, marketing strategies, business administration, and processes. The business plan lets the lender see your plan for repayment through these examined and well-thought-out parts of the plan. The business plan gives the lender assurance that you can repay the loan. Without this assurance, no lender will grant you a business loan.
You Must Plan for Every Case Scenario
In the financial forecasts, lenders expect to see an explanation of at least twelve months broken down by month, including the best through worst-case scenarios. The likely lender needs to see that you will financially endure and make loan payments even if your business has a month that sees a 10, 20, or even 30% drop. Showing this amount of monthly detail will let a lender know that you have a plan to survive the inevitable downturns businesses experience.
You should do this as a monthly breakdown because knowing the good and bad times of year for your business shows you understand your business and finances.
Some businesses will boom in the summer and die in the winter, and others are solid during the holidays and possibly make their year in a two or three-month period. Having this deep knowledge of your business and its financial projections month to month will give a lender great confidence and get you a positive result.
You Must Have Business History or the Equivalent Cash Equity
If you are obtaining a loan to help your business expand, you will have some business accounts. Many lenders will require two years of history in these cases. However, a lender may require the owner to have cash equity to inject into the business if you are a new business. The lender may need supplemental income to reduce the loan total, dropping the risk of non-repayment.
You Must be an Involved Owner
A lender is more likely to grant a loan to an owner with practical plans to amass accounts receivables and ensure that revenue is not tied up in bad debt expenditures. You should also show that all your cash liquidity isn’t going to be tied up in inventory but readily available to use for unforeseen business needs or to cover payments.
You should also show that you have a strong and direct marketing plan that will be carried through even when business is slow. Lenders understand that marketing is crucial to the accomplishment of a business. It has its own prominent section in every good business plan, showing that it is essential to generate customers and revenue.
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