What Is Needed for a Small Business Loan?
Getting small-business loans is often challenging, but possible. If you are starting a business, your challenges will be greater. Should your business have a positive operating history, with some consistent profits, finding loans will be easier. There are, however, some conditions, documents, and components common to all business loans. Understanding these requirements will help you properly request a small-business loan and get better results.
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Business Plan
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All lenders require you submit a clear and complete business plan. Your plan need not be overly sophisticated, but it must be reasonable and address the most important points of business success. Include an executive summary, which outlines your work and managerial experience, and the expertise of other key employees. Write a brief marketing plan, which should also include a survey of your competition and strategies to overcome competitive challenges. Describe your products, services, and pricing. Finally, project future financial and operating results for the next five years, one year at a time. Include balance sheets and income statements.
Ability to Repay
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All financial projections must include "debt service" -- loan repayment -- showing sufficient amounts to make reasonable principal and interest payments to pay your business loans. Preparing a cash-flow statement, showing projected cash inflows and outflows, for the next few years should give lenders the comfort they want to approve your loan request. Remember, while commercial lenders want your business to succeed, their primary focus is your ability to repay their loans.
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Good Business Credit
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Similar to personal, auto, and home loan criteria, good credit is a prime consideration of business lenders. Even if you seek your first business loan, your company can build a good credit history by paying vendors, suppliers, utilities, and lease/rent payments. If you are just starting a company, you'll need to rely on your personal credit to qualify for small-business loans.
Collateral
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Small businesses should always be prepared to offer lenders some collateral for loans. Acceptable collateral can be "hard" -- real estate, auto -- or "soft" -- accounts receivable, future sales contracts -- but must be acceptable to small-business lenders. These loan sources will tell you what collateral they consider acceptable. In business start up situations, many lenders will require you to pledge one or more of your personal assets, since the company has no history or assets and no verifiable credit..
SBA
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The dominant source of small-business loans, the SBA (Small Business Administration) often requires personal guarantees and collateral pledges. While the SBA makes few direct loans, it guarantees the loans of many small-business lenders. These guarantees typically require you to personally sign for these loans, which puts your personal assets -- homes, autos, bank accounts -- at risk should your business fail to succeed.
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