Small businesses are the lifeblood of this country, yet many of them might never have gotten off the ground if they were unable to secure the necessary start-up capital. Many people don’t realize small business loans are available for their venture, and many others simply are overwhelmed by the subtle nuances of securing a small business loan. Below is some important information that can help a business owner navigate the steps involved with applying for the funding their new business needs.
How Banks Decide on Lending
According to the Small Business Administration, the bank must consider the business’ model to be sound, with a high expectation of success, and it must be some kind of legitimate commerce. The loan applicant and any partners involved in the venture must be of “good character,” free from any past criminal activities, and have a good credit history. One of the most important criteria used by banks in considering a loan, is the anticipated ability of the applicant to repay the loan. In the event that a business venture fails, the owner’s personal collateral must be sufficient to cover the amount loaned, because whatever the business’ outcome, the bank cannot afford to absorb the loss along with the applicant.
The first thing required in the loan process is credit history for individuals involved, as well as credit history for any prior businesses the applicant(s) had. Financial statements for current and prior businesses are needed, in addition to projections of future finances. A strong, detailed business plan with anticipated cash flow demonstrates to the bank that the applicant has a clear idea on how to achieve success.
Increasing One’s Chances
It’s usually a good idea to work with a smaller bank when applying for a loan, because larger ones sometimes feel that small business loans are less profitable, even though the same amount of work goes into processing the loan. It will help an individual to work with banks that he/she has already done business with or that are in their community, and if there isn’t a large pool of these, credit unions and community banks should also be considered.
Size of Loans
The range of small business loans can be as diverse as the businesses themselves, but, in general, the average loan is around $130,000; with the low end of the loan spectrum being around $50,000 and the high end around $250,000. If the loan a business owner has in mind is somewhere in this range, it is right within the statistical norm. A loan application that falls in this range is also more likely to be approved.
There are many reasons why banks might decline an application, even if it is accompanied by a strong business plan, a good credit history and strong collateral support. Sometimes the economic climate is simply too risky, and banks are nervous about making any kind of loans.
One of the best options to pursue when bank lending seems very tight is to contact the Small Business Association (SBA). Their website has a great deal of information on acquiring a loan and how to achieve success, and they have an office in every state.
Many private lenders and lending agents, like Imperial Advance, also offer alternatives to traditional business loans, and in some cases much of the red tape involved with a normal business loan can be circumvented. Companies like this often represent a number of actual lenders, and help to arrange the loan so the applicant’s task is much easier.
Other organizations dedicated to assisting the small business owner are SCORE, which has roughly 300 chapters nationwide, the 900-odd chapters of Small Business Development Centers, and Women’s Business Centers, dedicated to supporting enterprises begun by females.