How to Finance a Small Business
Draft a business plan., Identify the type of loan you need., Identify collateral to secure the loan., Gather the typical documents necessary for a loan., Analyze your credit score., Apply for the loan., Contact banks about loans., Consider an SBA...
Step-by-Step Guide
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Step 1: Draft a business plan.
Most banks will want to see a business plan.A business plan is an outline of your goals and your plans for achieving those goals.
Your plan should include the following sections:
Executive summary.
Summarize your business and describe what you want—funding.
Description of your business.
Describe your industry briefly and identify any new developments that will impact your business.
Marketing.
Analyze your market and identify a target market.
Competitive analysis.
Identify the strengths and weaknesses of your competitors, as well as strategies that will give you an edge.
Development plan.
If you are developing a product, then describe the different stages and where you are in its development.
Also create a development budget.
Management and Operations.
Identify the key players in the business, such as the management team, and their tasks in the business.
Expected Use of Funds.
Include a description of how the financing will be used.
For example, you should detail your organizational expenses, working capital, equipment purchases, etc.
Financial analysis.
You should include financial statements for the business.
Also include a funding request.
Remember not to underestimate the amount you need.
If you do, you could face problems later if you run out of money.
Be careful also not to overestimate.If you need to buy equipment or inventory, then get estimates from suppliers. -
Step 2: Identify the type of loan you need.
There are different types of loans to choose from including a revolving, term, or installment based on need and use.
If you need more than one type of loan, then apply for more than one.
Consider the following types:
Working-capital loans.
Working capital loans are typically AR and Inventory loans that remain in place according to contract terms, even the amounts of each loan varies according to the level of AR and inventory.
Equipment loans.
You can get a loan to purchase or lease office equipment as well as vehicles, machinery, or tools.
Lines of credit.
These loans are like working-capital loans and provide money for daily cash flow.
They can have short repayment periods, such as 90 days.
With a line of credit, you only use the money you need and pay interest only on that amount.
For example, a bank might extend a $10,000 line of credit.
You can borrow $2,500 and pay interest on that amount. , Collateral provides the bank with protection in case you default.
If you can’t make payment, then the bank can foreclose on the assets used as collateral.
If you don’t have business assets, then you’ll need to pledge personal assets, like your home.If you are seeking a loan to buy equipment, then you’ll probably secure the loan with the equipment itself.
The same is true of real estate. , You will need to provide the bank with extensive financial information.
Talk to the lending officer ahead of time so that you can gather what you need.Depending on the bank, you may need to provide the following:
Copy of your business plan.
Information about accounts receivable and accounts payable.
Provide sales and payment history as well as credit references.
Audited or reviewed financial statements.
Insurance information.
Your personal financial information.
The bank wants to see information about your personal assets and liabilities, including investments.
If your business has multiple owners, then personal financial information will be required from all significant owners.
Prior tax returns. , Getting a business loan isn’t easy.
To be competitive, you will need a credit score over 650 and preferably above
700.The bank will also need to look at your credit history and confirm that you are current on loans.
Before applying, you should pull your credit report and check for errors.
Remember to look at both your personal credit history and your business’ credit history.
If you find errors, then you can contact the Credit Reporting Agency whose report contains the error.
Generally, you can report errors online or by writing a letter.
The agency should report back within 45 to 60 days. , Gather all required information and go to the bank to apply.
Before signing on the dotted line, you should review the loan’s details, such as repayment period and interest rate.
If the details are acceptable, then complete the loan package application.You generally will need to wait two to four weeks before hearing back from the bank. , You can approach any commercial bank and ask for a business loan.
However, you might be more successful if you approach local banks or credit unions.
As a small business, you probably aren’t a good risk for large national banks unless you have a history of successful businesses behind you.
Contact banks or credit unions you do business with.Tell them you are looking for a business loan and ask them about the process.
You can also ask other small business owners where they have gone for loans.
If they recommend a bank, then call the bank and ask to speak to a lending officer. , The U.S.
Small Business Administration guarantees loans for small businesses.
You still apply for the loan with a bank, but the SBA will guarantee to pay the loan should you default.
You will need to provide much of the same information for an SBA loan as you would for a regular bank loan.
The SBA offers several kinds of loans.
For example, their 7(a) Loan Program provides flexible loans you can use for working capital or to purchase equipment or land.
Loan terms are 10 years for working capital and 25 years for fixed assets.
You can borrow a maximum of $5 million.Microloans are also available.
The average microloan is for $13,000 but can be up to $50,000.
You can use these loans for anything except paying current debts or buying real estate.
There are also special loans for disaster recovery and for purchasing real estate and equipment. , Online lending is a booming industry.
You can apply for your loan quickly and receive a decision within a few days.Online loans are ideal if you didn’t qualify for an SBA loan or if you need the money fast.
You can find lenders by searching the net.
Some of the more popular lenders include Kabbage, Prosper, Fundbox, and BlueVine.
To obtain a loan, your business probably must be at least a year old.
Younger businesses should use other financing options.
Thoroughly research the interest rates, fees, and the repayment period.
For example, some online lenders can charge up to
29.99% annual interest and have repayment periods from 12 weeks to several years.Also be on the lookout for scams.
A legitimate lender should have an address and phone number listed on their website.
Also avoid loans that require advance insurance fees before you get your loan., It might feel awkward to ask people you know for a loan.
However, you can agree to pay interest and draw up a loan agreement, which makes it official.
Sometimes borrowing from friends or family is the best option, especially if you can’t qualify for bank loans. , Whichever loan you obtain, you should make timely payments.
Pay the amount due in full before the deadline so that you don’t accrue late charges or penalties.
Consult with a business or bankruptcy attorney if you think your business is going under.
They can advise you about your options.
Don’t keep piling up debt.
When you find yourself taking out new debt to cover old debt, you should consider shutting down the business. -
Step 3: Identify collateral to secure the loan.
-
Step 4: Gather the typical documents necessary for a loan.
-
Step 5: Analyze your credit score.
-
Step 6: Apply for the loan.
-
Step 7: Contact banks about loans.
-
Step 8: Consider an SBA loan.
-
Step 9: Research online loans.
-
Step 10: Ask friends and family.
-
Step 11: Make timely loan payments.
Detailed Guide
Most banks will want to see a business plan.A business plan is an outline of your goals and your plans for achieving those goals.
Your plan should include the following sections:
Executive summary.
Summarize your business and describe what you want—funding.
Description of your business.
Describe your industry briefly and identify any new developments that will impact your business.
Marketing.
Analyze your market and identify a target market.
Competitive analysis.
Identify the strengths and weaknesses of your competitors, as well as strategies that will give you an edge.
Development plan.
If you are developing a product, then describe the different stages and where you are in its development.
Also create a development budget.
Management and Operations.
Identify the key players in the business, such as the management team, and their tasks in the business.
Expected Use of Funds.
Include a description of how the financing will be used.
For example, you should detail your organizational expenses, working capital, equipment purchases, etc.
Financial analysis.
You should include financial statements for the business.
Also include a funding request.
Remember not to underestimate the amount you need.
If you do, you could face problems later if you run out of money.
Be careful also not to overestimate.If you need to buy equipment or inventory, then get estimates from suppliers.
There are different types of loans to choose from including a revolving, term, or installment based on need and use.
If you need more than one type of loan, then apply for more than one.
Consider the following types:
Working-capital loans.
Working capital loans are typically AR and Inventory loans that remain in place according to contract terms, even the amounts of each loan varies according to the level of AR and inventory.
Equipment loans.
You can get a loan to purchase or lease office equipment as well as vehicles, machinery, or tools.
Lines of credit.
These loans are like working-capital loans and provide money for daily cash flow.
They can have short repayment periods, such as 90 days.
With a line of credit, you only use the money you need and pay interest only on that amount.
For example, a bank might extend a $10,000 line of credit.
You can borrow $2,500 and pay interest on that amount. , Collateral provides the bank with protection in case you default.
If you can’t make payment, then the bank can foreclose on the assets used as collateral.
If you don’t have business assets, then you’ll need to pledge personal assets, like your home.If you are seeking a loan to buy equipment, then you’ll probably secure the loan with the equipment itself.
The same is true of real estate. , You will need to provide the bank with extensive financial information.
Talk to the lending officer ahead of time so that you can gather what you need.Depending on the bank, you may need to provide the following:
Copy of your business plan.
Information about accounts receivable and accounts payable.
Provide sales and payment history as well as credit references.
Audited or reviewed financial statements.
Insurance information.
Your personal financial information.
The bank wants to see information about your personal assets and liabilities, including investments.
If your business has multiple owners, then personal financial information will be required from all significant owners.
Prior tax returns. , Getting a business loan isn’t easy.
To be competitive, you will need a credit score over 650 and preferably above
700.The bank will also need to look at your credit history and confirm that you are current on loans.
Before applying, you should pull your credit report and check for errors.
Remember to look at both your personal credit history and your business’ credit history.
If you find errors, then you can contact the Credit Reporting Agency whose report contains the error.
Generally, you can report errors online or by writing a letter.
The agency should report back within 45 to 60 days. , Gather all required information and go to the bank to apply.
Before signing on the dotted line, you should review the loan’s details, such as repayment period and interest rate.
If the details are acceptable, then complete the loan package application.You generally will need to wait two to four weeks before hearing back from the bank. , You can approach any commercial bank and ask for a business loan.
However, you might be more successful if you approach local banks or credit unions.
As a small business, you probably aren’t a good risk for large national banks unless you have a history of successful businesses behind you.
Contact banks or credit unions you do business with.Tell them you are looking for a business loan and ask them about the process.
You can also ask other small business owners where they have gone for loans.
If they recommend a bank, then call the bank and ask to speak to a lending officer. , The U.S.
Small Business Administration guarantees loans for small businesses.
You still apply for the loan with a bank, but the SBA will guarantee to pay the loan should you default.
You will need to provide much of the same information for an SBA loan as you would for a regular bank loan.
The SBA offers several kinds of loans.
For example, their 7(a) Loan Program provides flexible loans you can use for working capital or to purchase equipment or land.
Loan terms are 10 years for working capital and 25 years for fixed assets.
You can borrow a maximum of $5 million.Microloans are also available.
The average microloan is for $13,000 but can be up to $50,000.
You can use these loans for anything except paying current debts or buying real estate.
There are also special loans for disaster recovery and for purchasing real estate and equipment. , Online lending is a booming industry.
You can apply for your loan quickly and receive a decision within a few days.Online loans are ideal if you didn’t qualify for an SBA loan or if you need the money fast.
You can find lenders by searching the net.
Some of the more popular lenders include Kabbage, Prosper, Fundbox, and BlueVine.
To obtain a loan, your business probably must be at least a year old.
Younger businesses should use other financing options.
Thoroughly research the interest rates, fees, and the repayment period.
For example, some online lenders can charge up to
29.99% annual interest and have repayment periods from 12 weeks to several years.Also be on the lookout for scams.
A legitimate lender should have an address and phone number listed on their website.
Also avoid loans that require advance insurance fees before you get your loan., It might feel awkward to ask people you know for a loan.
However, you can agree to pay interest and draw up a loan agreement, which makes it official.
Sometimes borrowing from friends or family is the best option, especially if you can’t qualify for bank loans. , Whichever loan you obtain, you should make timely payments.
Pay the amount due in full before the deadline so that you don’t accrue late charges or penalties.
Consult with a business or bankruptcy attorney if you think your business is going under.
They can advise you about your options.
Don’t keep piling up debt.
When you find yourself taking out new debt to cover old debt, you should consider shutting down the business.
About the Author
Lori Bailey
Experienced content creator specializing in hobbies guides and tutorials.
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