Attaining a Small Business Start Up Loan
Let me get straight to the point. If you are going to start up a business, you will need some sort of small business start up loan from a third party source. I know, a lot of start up entrepreneurs are going to say that's hog wash and you don't need a business loan but I'm going to tell you right now that a business loan can save you from some very bad situations.
I've been in the business planning field for over 5 years now and I've seen a lot of businesses succeed and I've seen a lot of business fail. Those that fail have one thing in common and that's a lack of planning for operational costs for the first year of operations.
I know, there were some other fundamental flaws with the business but the lack of cash is the final stop. If you have no cash to pay workers and creditors, it's only a matter of time before you go under. Imagine this, you estimate that you will need $100,000 in your business plan for start up capital and operational costs. You have about $120,000 in equity from remortgaging your house in order to start up your business.
So, you disregard any advice for a small business start up loan and go ahead with the business. You go out and buy all of your capital equipment and go ahead with the renovations.
Before you know it, the actual costs are coming in at $110,000 and the project is not even close to being complete. You have problems with the contractor, septic systems, machinery breakdowns, labour, and whack of other things.
You're almost out of money and you haven't even opened your doors. In a panic, you run to the bank for a business loan. You meet with the business manager and he tells you that he can't do a thing for you because you have no equity to leverage any debt. So you can't get a loan.
You've maxed out all of your credit cards and you don't have any money left to pay for the start up costs. You don't sleep a wink at night because you put up your house as equity and all of your money is tied up in the business. What do you do? Pray for a miracle? Since you don't have any equity to leverage a business loan, you have to close your doors before you even open them. This is every entrepreneurs nightmare.
I know, it sounds like a grim scenario but I've seen it happen, many times. It is so important that you get some sort of business financing. If the person in the above example would have went to the bank at the very onset for a business loan for the start up, he could have saved his business from going under.
Personally, a business start up loan serves to bridge the short term. That is, the loan helps to cover off those unforseen operational costs that can quickly add up. And let me tell you this, it will happen. If you think you're going to make a whole whack of cash right from the start - Think again.
A lot of people dream about owning their own business. Some actually go forward while others keep dreaming. What is the difference between those that start their own business and those that don't? What separates a successful entrepreneur and an unsuccessful entrepreneur?
In my experience, a lot of the problems that entrepreneurs face is the lack of any financing. In many cases, it seems to be whether the prospective business owner has access to sufficient funds to turn their business dreams into reality.
I've seen potential businesses close their doors even before they've opened. Why? One of the problems is their failure to secure any type of business financing. It is difficult to guess how many businesses never even start because of that same lack of financing.
Just trying to figure out where to attain small business start up loan can be confusing, frustrating and time consuming. Hopefully, after you've read this article, you will have a better understanding of how to attain a small business loan.
Let's get started...
How Much Money Do You Need To Get Your Business Going?
This depends on the type of business you're going to get into. All things being equal, it is possible to get a rough idea of how much funds you'll need in order to get your business off the ground. To get an estimate of how much money you'll need for your business, you'll have to consider a few key factors.
What kind of product do you have?
Are you going to produce a product or offer a service. Generally, a service business will require less cash because it will require less capital costs such as material and equipment costs. High capital businesses such as manufacturing will generally require more cash because it will need to factor in costs of goods such as raw materials, equipment needed and expenses incurred.
A service business will require less cash than a capital intensive operation and therefore a lower small business start up loan.
Do you have the necessary personal equity to put into the business. I'm not going to lie to you. Know one is going to put up a dime unless you have a certain amount of personal equity into the business, generally cash equity . This figure is around 25 to 50 percent of the total estimated cost of the project, possibly higher.
The amount of equity required is also influenced by other credit factors, such as management experience and adequacy of collateral. Remember, your equity is going to be very important in terms of how much financing you can leverage as a small business start up loan.
If you don't have a dime to your name and your looking to start up a business, you might want to put your idea on hold until you can save enough money to leverage enough debt to get your business going.
Who's going to be working? Do you intend to do most of the work or are you going to hire outside help. Generally, you will want to contribute your own time to the business as the main source of labor. This is one way to control labor costs. Later, when your business starts to take off, you can hire additional help in order to meet demand.
Can you sustain a living?
I'd say 90 to 95% of all businesses don't see a dime of profit for the first six months of operation (sometimes even longer). It is necessary to estimate how much personal expenses you are going to incur for the first six months of operation and plan how much you need to meet these expenses.
The following list is a general list that most businesses will incur. Beside each one, take an estimate of how much each will cost. Remember that your business might have more or less expenses.
Once you have estimated the amount expenses for your business, you will need to break down the figure into financing portions. For example, if you have a total estimated project cost of $50,000, how are you going to break this figure down into financing.
I strongly suggest you do a month by month cash flow for the first year. If you don't know how to do a cash flow statement, try working with your banker, accountant or click here . By doing a cash flow statement, you will realistically estimate the amount of cash you need to sustain your business.
Types of financing
There are basically two types of financing, debt and equity. Deciding on which route to take will depend on the following components:
-How much control of the business do you want to give up
-How much of a small business start up loan are you comfortable with as compared to equity (called leverage)
What is debt financing?
Debt is basically a legal promise to pay someone back a certain amount of dollars plus interest. In exchange for having lent you the money, an investor will want to be paid interest. The main advantage of debt is that you still have control of your business. The downside is the obligation to make the monthly payments to the lender no matter what.
What is equity financing
An equity investor will add capital into your business for a percentage of ownership. Equity financing involves no direct obligation to repay any funds. It does, however, involve selling a partial interest in your company.
The main advantage of equity financing is that you don't have the monthly payment obligations. The downside is that you lose a certain amount of ownership of your company.
Sources Of Financing
The following list are examples of possible sources of financing.
Personal savings are probably the number one financing source that most businesses take when starting a new business. The great thing about personal equity is that you don't have to pay anyone back and you still maintain 100% control of the business.
Most lenders for small business start up loans require that a reasonable percentage of your own funds be invested in your business, as an indication that you will work hard to make the business a success. As stated earlier, know one is going to lend you a dime unless you have some personal equity in the business.
Friends and family
Friends and family can be an important source of financing for your business. The number one advantage to this type of financing is that your friends and family will be a lot more understanding of you than someone who doesn't know you.
The greatest disadvantage is that it can put your relationship at risk if things get shaky or if there is a misunderstanding. It's important to keep the arrangement formal. This way it's more professional and it will help keep the misunderstandings down to a minimum.
The investment can take the form of a direct loan or an equity investment. It will depend on how well they know you.
Places to look
Banks can be a little tricky when you are trying to attain a small business loan. Each bank operates differently and policies will differ. Banks may be one of the first sources that come to mind when you begin searching for a small business start up loan. The great thing about banks is that they have money available to lend.
However, it may be difficult for a new business to get a loan from a bank since lenders usually prefer to lend to established businesses. Of course, not all banks look at it this way.
I suggest you approach your bank and get to know the commercial banker. From a banking stand point, it gives them more confidence when they are dealing with someone they know.
Remember, you need equity to leverage a small business loan. The equity can be in the form of cash, investments, and tangible collateral such as vehicles, land and buildings. If you don't have a dime to your name and you don't own anything, it's going to be very difficult to get a loan.
Also remember you need a good credit rating. If you don't have a clean record, banks simply won't take you seriously. I'll describe the credit process in more detail below.
Certain insurance companies will invest a portion of their unused income into small business start up loans. If you borrow from an insurance company, you can expect terms and interest rates similar to those available from a commercial bank.
These types of companies will lease or rent businesses various types of equipment. By renting rather than buying the equipment your business will need, you will be able to avoid many capital expenditures associated with the purchase of equipment. Sort of like a small business loan but the company will actually loan you the equipment.
Capital Venture Companies
Capital venture companies are companies that will invest in your company for a percentage of ownership. These companies will invest in your company if they see the possibility of high and quick returns.
In other words, they want to make the highest return in the shortest amount of time possible. These investments are not really loans.
In general, venture capital firms are most interested in investing in new technology and can typically supply large sums of money. It's important to note that venture capitalists are not passive investors. They will want to play a major role in the direction of your company. Can be a quick source of funds in terms of a small business start up loan.
These companies can be found on the internet. Simply type in venture capitalist.com and you will come to a huge database of venture capitalists who might be willing to give you a business plan.
Types Of Small Business Loans
Banks and other financial institutions can assist you by providing funds through personal or commercial credit. Examples of personal credit include automobile loans, credit cards, and home mortgages. Commercial credit includes small business start up loans;
Here are some options for a start up loan:
Short-term business loans are one of the most common types of small business start up loans and are usually for less than one year. They can provide interim working capital for a business temporarily in need of cash, and are typically repaid in a lump sum when inventory or accounts receivable are converted into cash.
Intermediate-term small business loans are often used for a business start-up, the purchase of new equipment, expansion, or an increase in working capital. The maturity dates range from one to three years.
Long-term business loans generally are made for major capital improvements, acquiring fixed assets, or business start-ups. The term of the loan runs for periods of three to five years and is usually based in part on the life of the asset financed. Repayment is usually made in monthly or quarterly installments.
A line of credit offers you the ability to borrow money repeatedly, up to your credit limit, without having to reapply. A line of credit is particularly important to businesses that experience seasonal fluctuations. The great thing about this type of credit loan is that you only pay interest on what you take out and not on the whole prinicple like term loans.
The lender generally will perform a review once a year, at which time the borrower is asked to provide updated financial statements.
You might also want to check out the internet. The following company provides small business start up loans and their approval process is super fast:
SmallBusinessLoans.com has been facilitating small business start up loans on the internet since 1997. During the past 4 years they have handled over $50 billion in loan requests from small business owners across the country who have taken advantage of their premier funding sources and the internet to get the money they need in a quick, efficient and secure manner.
Small Business Loans.com will review your application and will respond to you in 48 hours.
America One Funding
America One Funding provides small business start up loans and personal loans. Their specialty product is an Unsecured Signature Loan that can be used for any purpose, business or personal with no collateral required. Please note that this is only for the residence of the United States.
The Credit Application Process
Applying for credit can be tedious. It calls for more documentation than you might initially have expected and certainly a lot more than when you apply for consumer credit.
For lenders, extending credit to an entrepreneur usually means customizing the small business start up loan to suit the credit needs of that business. So don' be disheartened by the amount of paperwork needed to accompany the application. Instead, be prepared!
Among the best assets you can bring to the lender is a well thought-out and documented business plan. You need to clearly state the purpose of the small business start up loan (will the money be used for temporary working capital, buying equipment, or expanding facilities); the amount of funds needed and for how long; and a repayment schedule. Your business plan should include the following information:
1) business description that tells the nature of the business, describes the product and its market, identifies its customers and competition.
2) personal profile that outlines the background and experience of each of the principals in a resume.
3) proposal that states the type of loan requested and its purpose.
4) business plan that outlines your corporate strategy for the next three to five years; it will aid you and the lender in determining whether the business will generate the cash flow needed to repay the loan.
5) repayment plan that tells how you propose to repay the small business start up loan or outlines a repayment schedule. The lender will be expecting you to repay the borrowed funds from the profits produced by the business. As a contingency, you might need to develop a plan on how you would repay the small business start up loan if the profits alone turned out to be inadequate.
6) supporting documentation will include copies of pertinent papers that support the information contained in your loan proposal-for example, a lease, certificate of incorporation, partnership agreement, letters of reference, contracts, invoices or vendor quotes.
7) collateral that you will use to secure the payment of the small business start up loan. Collateral can include business and personal assets such as inventory, equipment, and accounts receivable or real estate, stocks, bonds, and automobiles.
8) financial statements, both personal and for the business. The business financial statement should be provided for the last three to five years of operation including a year-to-date interim report. It should contain a balance sheet showing business assets and liabilities, and a profit-and-loss statement showing revenues and expenses.
The lender uses this information to calculate a debt-to-worth ratio for the business. Be prepared to provide copies of tax returns for the business for this same period.
The personal financial statement should list your assets and your liabilities. Identify the names in which title to each asset is held and its fair market value. You should be prepared to provide copies of your personal tax returns. You may be asked for a list of credit references. Lenders will check your personal as well as your business credit rating.
Lenders will carefully examine your financial statements and business projections. As a borrower, you must be fully prepared to answer questions about them.
9) personal guarantees of the owners or other principals usually are required, even from an established business.
The lender also may request another party's guarantee such as a cosigner or a surety, or may request a government guarantee from the U.S. Small Business Administration or other government agency.
In addition to the personal guarantee that you give, under the Equal Credit Opportunity Act the lender is allowed to require another person's guarantee should your application fail to meet the lender's standards of creditworthiness.
If all or most of the assets listed on your personal financial statement are owned jointly with your spouse, or with someone else, the lender is likely to require such a guarantee. But the lender may not require that your spouse be the guarantor.
In the case of secured credit, the lender is allowed to obtain a spouse's or other co-owner's signature on certain documents when the applicant offers, as security for the loan, property that the two own jointly.
In this case, the spouse or other co-owner may be asked to sign documents---such as a mortgage or other security agreement that would be necessary under applicable state law to make the property available to satisfy the debt.
Before you approach a lender for a start up loan, you might want to seek the advice of another, more experienced "set of eyes" to review your business plan, particularly if you are a first-time borrower.
By doing so, you'd be getting the loan package in shape to make it easier for the lender to reach a favourable credit decision.
There are some business support groups whose members could counsel you on how your package looks. A qualified counsellor might even discover that you really don't need more money, and instead suggest better inventory control, improved marketing techniques, or other changes that could actually solve your growth problems.
What if I'm not approved for a small business start up loan?
Most lenders, banks especially, are conservative in granting small business start up loans. Given the obligation to their stockholders and depositors, they need to be sure there's a good chance that the loan will be repaid.
If your application for credit is not approved, find out the reasons why. Some of the reasons that lenders often give for denying a small business loan include, for example, insufficient owner's equity in the business; lack of an established earnings record; a history of slow or past-due trade or loan payments; or insufficient collateral.
Finding out the reasons may help you qualify the next time you apply for a business start up loan. The lender will keep you informed about the status of your application.
If you are considered a "small business" (when your business revenues are $1 million or less, or when you are applying to start up a business), a lender has 30 days to let you know, either orally or in writing, whether or not you get the small business start up loan.
The 30-day period begins after the lender has received all of the information needed to evaluate your credit request. If your application is denied, the lender must give you either:
-a written statement of the reasons for denial, or
-a written notice telling you of your right to obtain the reasons in writing. This notice may be given to you during the application process or at the time of the denial.
The lender also will keep for one year the records relating to your application.
Different rules apply for larger businesses (those with more than $1 million in revenues). Within a reasonable period of time after getting all the necessary information on which to base a decision, the lender must decide and let you know whether or not you get the credit.
Then you'll have 60 days in which to ask for a written statement of the reasons why you were denied credit; this is important to remember because the lender need not notify you of this right. The creditor will keep records of your application for a small business start up loan for at least 60 days after telling you of the credit decision.
If within the 60 day period you request that records be kept longer, or ask for a written statement of the reasons for denial, records will be kept for one year.
Remember, keep on trying!