Starting a small business means you need funding, and the funding you need often comes at least partially in the form of getting a business loan. This may only be a part of your funding, but it is important to know what you need, when you will have to start paying it back, how long it will take to pay it back and what your payments will look like, and other key factors.
If you are trying to secure a small business loan, the lender may have a lot of questions for you, and there are things you should know yourself before you even apply.
1. Know What You Need
The first thing to do is make a list of what you will need to start your business. This list should be created or separated into two different parts. The first is the list of what you will actually need to start your business, the second should be comprised of what you want, or things it would be nice to have.
Remember, some things are essential, especially when you are just starting out. You will need to spend more on marketing materials, equipment, and even paying vendors out of pocket. Be sure to account for these items in the things that you need.
2. Know How Much it Costs
Once you have determined exactly what you need, each item needs to be assigned a cost. The more precise you are with these costs, the more successful your funding will be. Not only do lenders and others want to know that you actually know what costs you are looking at, but it shows a level of organization that gives them confidence in your new business.
In looking at costs you should determine how long it will take you to start making money. You may need to cover some expenses like marketing and payroll for a few months until the company is on its feet. Be sure to include this in your cost accounting.
3. Weigh Your Assets
What assets do you have, and how can you leverage them? Does your business own real property you can borrow against including vehicles and equipment? At first you may not have many assets that belong to your company, and it is risky at best foolish at worst to use your personal assets to secure a business loan.
Still, it is important to know what you have and how it can best be leveraged when trying to secure a small business loan.
4. Know Your Credit Score
New company? Your financing will often require a personal guarantee. While the loan will show on your business credit, your credit score may determine interest rate, term, and the amount you can borrow. Know your credit score before you apply for a loan so you know what to expect.
5. Choose Your Term
How long to you need the loan for? This will also directly affect your payment and the interest you will pay. Small Business Administration loans often vary from 5 to even 25 years in length. Other financial institutions have shorter term loans, and a business line of credit is often truly short term, only for a year or two. Look at what you need and can afford for the business loan you are trying to secure.
6. Choose the Right Type of Funding
This is where the right type of funding comes in. Do you need a long-term loan? A short-term business line of credit? Can you get by with just putting some items on a business credit card? The choice depends entirely on the project you are working on and what you want to accomplish in what amount of time.
Just keep in mind the term and payment options with each, and the amount you will qualify for. This can help you determine the right kind of funding or whether you should blend types of funding or not.
7. Remember to Take Interest
One of the biggest factors in your loan is the interest rate and how it is figured over the term of the loan. This will not only affect your current payment, but the balance you will pay in the long run.
Make sure that even if you have longer term, low interest loans there are no penalties for paying them off early.
8. Keep Things Realistic
The number one thing to keep in mind when you are trying to secure a small business loan is to keep things realistic. What can you afford? What do you really need? What is a distraction you can do without?
The answer to these questions, and following the 8 tips above will make it more likely that you not only secure a small business loan, but that you get the right one at the right rate, and at the right time.
Are you thinking of applying for a small business loan? What would you allocate your new found source of funds towards? Leave us a comment in the section below.