How to Apply for a Small Business Loan
Whether you’re getting ready to start a new business or you’re looking to grow an existing one, there may come a time when you will need a small business loan.
The first step is to apply for a loan through a commercial bank, preferably one you already have a relationship with. If you are unable to secure financing that way, you can apply for a loan through the Small Business Administration (SBA). The SBA may be able to assist you in getting a loan from a lender that wouldn’t normally loan you money without the SBA’s endorsement (details from the SBA). The SBA will not consider loan applications until you can prove that you have exhausted traditional lending options.
Regardless of what route you take, you will be expected to have your ducks in a row before you initiate the loan application process.
Your prospective lender will require comprehensive documentation of your personal and business financial status and a clear understanding of your businessâ goals and plans . It will want to get an idea of who you are as a person.
- Banks will ask for many documents including:
- Bank statements
- Business plan
- Cash flow projection (a projection of income and expenses)
- Tax returns and all related financial documents for both the owner and the business
- Detailed breakdown of existing capital and collateral (including cash, real estate, machinery, vehicles, etc.)
Banks will use all of these documents to determine whether loaning money to your business is a safe bet. There are many factors they will consider, including your business’ working assets, its debt-to-worth ratio, the rate at which income is received after it is earned, the rate at which debt is paid after becoming due and the rate at which the service or product moves from the business to the customer. For new businesses, banks will be looking for an educated guess on these indicators and documentation to back your estimate up.
Lenders will also consider its working assets and how much of your own money the owner and principals are willing to invest.
“Lenders will expect you to contribute your own assets and to undertake personal financial risk to establish the business before asking them to commit to any funding,” explains the Small Business Association’s web site.
While some commercial banks will allow your business entity to secure and take responsibility for the loan, all SBA loans require personal guarantees from those who own 20 percent or more of the business, plus other individuals who hold key management positions.
Finances aren’t the only thing that banks will consider when deciding whether to loan you money. Your personal appearance, attitude and demeanor are all indicators of whether your business will succeed.
The SBA web site clearly warns prospective borrows that a lender’s decision to loan money is a subjective one.
“Character is the personal impression you make on the potential lender or investor,” states the SBA’s web site. It helps them determine whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company.
James Jacobs, a retired president of a financial services group in Dallas and a SCORE (Service Corps of Retired Executives) advisor, puts it more succinctly.
“Don’t go in and apply for a loan in your flip-flops,” Jacobs advised. “You’ve got to act like you’re in business even if you’re not yet.”
A comprehensive business plan will say a lot about who you are and what you chances of success are, Jacobs told BusinessNewsDaily.
He advises making sure your business plan includes an executive summary, a business profile, anticipated sales and a marketing plan. SCORE offers a business plan creation kit on its web site, and there are several business plan software options to guide you through the process.
For more detailed help on applying for a loan, the SBA offers a free course on its web site called, “How to Prepare a Loan Package.”
- Finance Options for a Business Startup
- How to Write a Business Plan
- What a Small Business Development Center?