Is this your first time venturing into the small business loan frontier? Obtaining a small business loan is one of the key steps to launching or expanding a business. If you hope to secure such financing, there are two crucial aspects of this process to keep in mind.
One, proper financial planning is critical to your success. Two, the way you present your business idea, business plan and financial forecasts can make the difference between gaining or not gaining the approval of investors or a bank. Of course, there are many other do’s and don’ts to follow as well, including ensuring you understand the types of loans available to you.
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Below are the types of loans, also known as debt financing, you should consider for your first small business loan.
For more information on specific options, see our guide to choosing the right small business loan.
You can also pursue equipment financing (not to be confused with equipment leasing) and invoice factoring. Equipment financing reduces your risk since the equipment you buy, rather than any of your existing assets, serves as your collateral. Invoice factoring can help you both obtain funding and collect outstanding client payments.
Whether you need to create a budget or better manage your finances, you can take certain steps to make the most out of obtaining and using small business loans. Holly Signorelli, a certified financial planner and CPA, advises aspiring entrepreneurs and small business owners to maintain realistic expectations. Drawing on her more than 20 years of experience, Signorelli shared the following do’s and don’ts for small business loan first-timers.
About 90 percent of the time, clients come in with a huge budget made up of millions of dollars in profits, Signorelli said. But when you go through the line items, you see there isn’t anything to substantiate those numbers. Instead, there is hype about the product, the market in general and, most of all, the potential.
Banks and investors don’t want to buy your idea; they want to make a profit, Signorelli stressed. For them to believe in your idea, they have to believe there is a profit. With very few exceptions, they are not going to invest in your idea if it doesn’t make sense or if it feels too good to be true, Signorelli said. Your budget must be realistic.
Make sure every single line item has a reference behind it, Signorelli said.
“Real figures, real research — get down and dirty on it,” she said. “For example, if you are providing a service and your budget states that you can sustain XX amount of customers per month at XX amount of dollars, then the price of the service will be easy to show, given the average price of that service in your geographic area.”
However, you need to demonstrate why the customers would come to you versus the competition.
“That’s ‘down and dirty,’ and you can’t get too detailed; keep it short and to the point with backup,” Signorelli said. “Think about it: When you are reading a budget, you don’t want someone rambling about their pipe dream. You want to know that the person understands what it’s going to take to make a profit and has a clear plan to bring in business.”
In other words, you want to provide details, but you want them to be short and concise.
“In 20 years, I have never seen a budget where the income was as high as predicted in the first year,” Signorelli said.
This is critical because a lack of income in the first year is what causes 80 percent of small businesses to go out of business, she said.
“Once your budget is done, go back to it and reduce your income 25 to 50 percent less than what your due diligence led you to put on the report,” Signorelli advised.
“There are things that you underestimated, no matter how meticulous you were, and there are things that you forgot altogether,” Signorelli said. “Just like income, you need to go back to your budget and take your expenses and increase them by 25 to 50 percent.”
As a small business owner, you must have enough savings to make sure you can pay your bills during the first year, Signorelli said.
“It [is] hard enough to get your loan, but I promise you that six months into [it] when you are not profitable, no one will want to loan you more money to get you through the next six months,” she said.
To make it through the first year and build a profit, focus on marketing and bringing business in so you don’t need to stress about finances, Signorelli said. Manifesting and building a business requires you, the owner, to believe in yourself and your new small business.
With the right budget, Signorelli said, you will receive the right amount of money from the right investor, which will give you the freedom and confidence to focus on your dream and make it happen. Don’t let financial stress stop you from focusing on the day-to-day tasks designed to attract customers, like social media marketing. Without customers, then your finances will really be in trouble.
Email marketing tools and marketing automation platforms work in tandem to reduce the manual work involved in promoting your business. Browse our picks for the best email marketing services to get started with these time-saving, sales-driving technologies.
No two lenders — not even lenders that offer the same type of loan — have quite the same terms. If you find two lenders willing to offer you a loan amount favorable for your budget, one of these loans is likely to have a higher APR than the other. The higher-APR loan, though, might have a shorter term, meaning that the burden of repaying your debt lasts longer with the other lender than with this one. The disadvantage of a longer loan term may outweigh the appeal of a low APR in that scenario.
You should also consider the loan provider itself. Browse the company’s customer reviews and determine the level of customer support you’ll receive. A trusted lender willing to assist you may be better than a less-reputable lender with more favorable loan terms. [Check out the financing options that bypass traditional banks.]
If you have a low credit score, your chances of being approved for a loan decrease substantially. The minimum credit score needed varies by loan type. This can range from as low as 550 for most merchant credit advances to as high as 680 for traditional bank or SBA loans. If your credit score is too low for the small business loan you desire, there are actions you can take to potentially build your credit score.
It’s essential to know how much funding you need so you don’t get charged prepayment fees when you repay your loans. Some lenders enact prepayment fees if you pay part or all of your loan back before your loan term ends. For example, if you take out a $20,000 loan when you only need $5,000 and then attempt to pay back the extra $15,000 after realizing you only needed $5,000, you’ll be charged fees you could have easily avoided.
Applying for a loan is rarely as simple as filling out an application. It usually requires you to file large amounts of paperwork as well. As such, it’s never too early to get all your documents in order. These documents can include tax returns and financial statements, like your profit and loss statement. You may want to speak with your bookkeeper and accountant to determine what you’ll need based on the loan for which you want to apply, but it never hurts to compile everything possible so you’re ready no matter what.
Yes, it’s OK that you made mistakes while trying to establish or expand your fledgling enterprise, as long as you’ve learned lessons from them.
“I worked for a great CPA right out of college for five years to learn all I needed to know to run a business,” Signorelli said. “I still made mistakes in the first few years, but the foundation had been set and above all else, it was not an option for it not to succeed. It was my life, and whatever you are taking on must be your dream that you will move heaven and earth to make happen.”
When applying for your first small business loan, create a budget, compare lenders, check your credit score, determine the funding amount you need, and gather the necessary documentation.
Eager and ready to secure the funding your business needs? Start with our choices for the best business loans, especially the below providers.
With patience and diligence, you can obtain a small business loan that achieves your funding goals without putting you too far in the red. If anything, consistent repayments and smart use of your loan funds can get your business fully in the black over time. On the other side of that lies the business success of your dreams.
Max Freedman contributed to this article. Source interview was conducted for a previous version of this article.