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Estimate true costs for start-up business loans

The cost of business start-up loans must include all expenses required. When calculating the cost of the loan, consider the breadth of costs included such as purchasing or renting space, buying inventory, paying employees, managing utilities and paying for advertising. Be sure to consider all costs related to starting and running the business during the first three-to-six months. Getting the right amount of a loan will ensure the business does not need a second loan later.

I recommend: Seek new business loans from banks and lenders specializing in start-up loans. Bank of America offers small business financing through lump sum loans or lines of credit. Their financial consultants help businesses determine their financing needs. National City Bank offers several types of loans for businesses including lines of credit, equipment purchase loans and mortgages.

Cut costs using government business loans

Small business loans may be backed by the federal government. These loans are available through approved commercial lenders. These loans traditionally offer a lower interest rate and more flexibility in their lending requirements than standard bank loans. They are available in a variety of forms, giving borrowers ways to compare costs and terms. The key aspect to note is these loans are often less expensive than traditional, bank-funded loans.

I recommend: Work through providers of commercial business loans for government-backed loans. The Small Business Administration provides the funding for business loans. Learn more about your options through this department of the federal government. Additional funding options are available through local organizations, special loan programs and other associations. The U.S. General Services Administration helps to educate business owners on their financing options.

Secure the best business loan based on interest and terms

A bank business loan includes a range of costs. The interest rate, term and closing costs should be compared from one lender to the next. Finding the most affordable business loan is possible when you compare several companies. Most will offer quotes for your business needs. To see the true cost of the business loan, use a loan calculator to compare various loan interest rates, monthly payments and terms. Closing costs should be estimated at one-to-five percent of the loan's value.

I recommend: Choose the right business loans by comparing options. Third-party websites provide current interest rates and term options for lenders for easy comparison. E-Loan provides current interest rates for small business loans, commercial mortgages and equipment leasing for easy comparison. Commercial companies allow you to compare business loans at their websites prior to application. Wells Fargo offers easy comparisons of their business lines of credit and loans, equipment and real estate financing and their SBA loans. Bankrate provides current interest rates on business lines of credit.

Helpful advice for making the most of this Guide

• •  Private lenders business loans are a good option for those with bad credit. Lending terms are flexible and they may not require payment of closing costs or costly fees. These lenders are often available locally.

Guide to Applying for a Business Loan from a Bank

What banks need to see before they'll hand over the dough

By W. Eric Martin, Keyboard pounder & synonym selecter, TwoWriters.net

1. Show the bank how the funds will be spent and what level of return you expect.
2. Prove that you're a trustworthy recipient who has good-standing in the community.
3. Lay the groundwork for future requests.

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Write a business plan

You might already have a general business plan that covers everything from the initial store layout to eventual world domination, but the bank wants to see how its funds will improve your business.

I recommend: Follow these five writing tips from SCORE (Service Corps of Retired Executives) for a business plan that includes everything a banker wants to see, with nothing extra that might be distracting.

Prepare your paperwork

The bank will want to know how you're going to repay the loan, which means that you'll need to have your financial documents in order for review. The bank will also review these papers to see how well you've handled money in the past and whether you keep good records.

I recommend: As this repayment analysis from business incubator Gaebler Ventures explains, you'll need to show personal and business tax returns, personal finance statements and cash flow records.

Know your loans

Loans come in many different flavors so ask for the one that works best for you. (Your banker might have a different opinion, after reviewing your records, so take his or her advice under consideration.)

I recommend: The basic types of loans are term loans (paid monthly), short-term loans (for a year or less), equipment financing, and open lines of credit (in which you take out money as needed up to a maximum amount per year). You can also borrow through Small Business Administration (SBA) loans at regular lending institutions.

Discuss dollars

Once the banker feels that your business is a good loan candidate, you'll start to negotiate the details of the loan.

I recommend: Ask the banker questions about all the topics related to the loan: the amount you'll receive (which isn't necessarily what you wanted), interest, repayment terms, loan fees, restrictions on the funds (such as being used for new equipment and not for labor costs), and your responsibilities as a borrower. Take notes and make sure you understand all of the agreement.

Apply online

Ideally you'll apply for (and receive) a loan from a local banker since ties to the community will likely work in your favor. In case that's not possible, you can consider applying for a business loan through an online company.

I recommend: BusinessWeek, for example, has an online loan application for currently operating businesses that takes only a couple of minutes to complete. The application will be sent to multiple loan suppliers.

Helpful advice for making the most of this Guide

• •  Make an appointment with a loan officer in advance. Don't simply walk into the bank with a stack of documents.
• •  Approach local institutions first, particularly those with which you currently have accounts. Those banks already have access to your records, so they can possibly review your application more quickly.
• •  Don't ask for the moon. Banks often have limits (either dollar amounts or a percentage of your annual revenue) on the amount they'll lend a first-time applicant.

Action Steps
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Learn about start-up business loans for a new business venture

Business start-up loans provide funds for the purchase of anything required to get the business open. These loans can be secured loans on equipment and property or unsecured lines of credit for other expenses. Some businesses borrow enough through their start-up loans to pay the business' expenses for the first three-to-six months in operation.

I recommend: Compare business start-up loans carefully. Look at interest rates, terms and the amount the lender will provide. For unsecured start-up loans, consider American Express, which offers a range of credit lines to businesses just getting started. They provide reward programs as well. Wells Fargo offers business real estate financing, equipment financing and lines of credit up to $100,000.

Determine if private business loans are available

When it comes to private lenders, business loans are a substantial part of their investing. This type of lending allows for borrowers to obtain money from investors, companies or others that are not associated with commercial banks. Generally, the process requires a less stringent approval process, with lower credit requirements. Some private lenders are every-day citizens.

I recommend: Obtain a business loan from a private lender locally by finding a partner or equity investor in the company. Consider third-party resources to find private investors including Second Venture, where the company helps businesses build capital by connecting investors with them. Consider working with NCH Corporate Headquarters to find the private lenders you need. For real estate investments for the business, consider private commercial lenders like Madison Realty Capital.

Find government business loans

Small business loans are available through the federal government. These loans are federally backed loans for a variety of business needs including start-up, real estate purchases, equipment purchases and expenses. These loans typically have lower interest rates and help millions of small businesses to start or remain open.

I recommend: Apply for a bank business loan through the Small Business Administration, the division of the federal government that provides small business loans. They offer disaster assistance loans, start-up loans, equity capital and surety bonds. To work with the SBA go through a commercial lender that will help you qualify for these government funds. Some businesses can qualify for specialized economic development loans through the Economic Development Administration, which is part of the U.S. Department of Commerce.

Helpful advice for making the most of this Guide

• •  Investments in commercial business loans often require a well-planned, professional looking business plan. The business plan allows the lender to see who is running the company, the cost of doing so, the way the money will be spent and why the business will be profitable. It convinces them to lend to the business.

Action Steps
The best contacts and resources to help you get it done

SBA loans

SBA loans are provided by traditional banks, but are backed by the U.S. government. This means that they are less of a risk for banks, which makes it easier for a new business to get this type of loan. SBA loans also typically come with a lower interest rate than a normal loan.

I recommend: Learn more about SBA loans through the Small Business Administration, which is the organization that backs them.

Commercial mortgage

Companies use a commercial mortgage in order to purchase a property for their businesses. This could be an office, warehouse or factory, but could also be an investment property, such as an apartment building.

I recommend: ZeroMillion.com describes commercial mortgages.

Agricultural loans

Agricultural loans allow farm owners to get the money that they need to run their farms, typically to purchase necessary farm equipment. Farmers can often receive government help for these types of loans.

I recommend: The Alaska Division of Agriculture discusses agricultural loans, maximum limits and what they can be used for.

Disaster loans

If your business has had property destroyed due to a natural disaster, and the costs have not been covered by insurance, you may qualify for a disaster loan. These are backed by the government. You must contact the Federal Emergency Management Administration (FEMA) to see if you are eligible.

I recommend: At GovLoans.gov, you can learn more about disaster loans.

Venture-capital funding

Companies can get venture-capital funding by trading equity in their businesses for the money needed to get the business off the ground. Venture capitalists are often mostly interested in technological or pharmaceutical industries. Companies should consider venture capital funding if they need millions of dollars.

I recommend: The British Colombia Ministry of Small Business, Technology and Economic Development offers a good description of venture-capital funding.

Early-stage funding

Early-stage funding, or seed funding, is the money needed at the very start of a company. This could buy necessary equipment or pay salaries to important workers.

I recommend: The Social Ecosystem discusses some of the methods of early-stage funding.