How to Start a New Business Loan
Starting a new business can be both exciting and frightening. You need to build up a customer base, advertise your product, produce your goods if you are selling goods, and/or rent office space and hire staff. While it is usually best to start out with the smallest amount of capital you need in order to get your business running successfully, you often need cash to get started at all. A small business loan can be the answer, if you are able to apply for a loan and get it approved.
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Instructions
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Determine the structure of your business. Do you plan to be a sole proprietor? If so, your business loan is essentially a personal loan. You will be applying for the loan using your Social Security number and credit information; if your business defaults, you are personally responsible for the loan. Are you going to form a partnership? If so, both you and your partner(s) apply together and are jointly responsible for the loan. Are you going to be an LLC (limited liability corporation), S corporation or C corporation? If you are going to form a corporation, you can apply for the loan in the corporations name, using the corporation's credit. Your personal assets will be shielded. However, you must file incorporation papers and become incorporated before applying for the loan for your business.
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Create a sound business plan. When you apply for your loan, your bank or other lender will want to see facts and figures. This is especially true if you are starting a new corporation or limited liability company. Since you are not personally guaranteeing the loan under these business structures, the lender will want to be reasonably sure that the business will be a success and able to pay back the loan before it approves you. Make sure your business plan includes projections for profits, and information about the current assets of the company. Assets are not limited to money; if your company has a patent that could potentially be worth serious money, the lender will want to know that.
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Assemble a list of potential lenders. This can include banks, credit unions, or private investors. In some industries, royalty financing and venture capital provide an alternative to traditional loans for those looking to start a business. These types of financing work differently because you don't pay back the money as in a traditional loan; instead your "lenders" are actually investors who are paid with a percentage of your profits or an ownership share in your company. If you want to pursue a more traditional loan, look to banks and credit unions. You can also consider federal Small Business Administration loans and grants. Often, the federal government or local economic development organizations provide start-up money at a lower interest rate then traditional lenders in order to encourage new entrepreneurs. Check with your area Small Business Administration office to see what types of loans or grants are offered.
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Speak with lenders to start the process for your new business loan. You will want to take your business plan and all other pertinent information to the meeting. You typically have to fill out a loan application or other paperwork, just as you would if you were applying for a personal loan. Remember, if your company is a corporation or an LLC, it is the company applying for the loan. The credit of the company and the information of the company should be listed on the application.
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Understand the terms and conditions if you are approved. When you get approval, it can feel like your work is done. However, you want to ensure you don't saddle your new business with an unfavorable loan. Consider the interest rate you are offered; is it so high that the benefit of the loan will be lost because any additional money you make for your business as a result will go to interest? What are the repayment terms and conditions of the loan? Are there fees? Make sure you ask all these questions and evaluate the answers before accepting a loan to open your new business.
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Tips & Warnings
The Small Business Administration may have grants available for minority owned businesses, including women-owned businesses. It never hurts to ask what type of funding is available.
