How difficult is it to take out a loan for my small business?
What should I keep in mind when approaching banks? Which banks and programs are best for startups/entrepreneurs? Are there other options that I should consider? Thanks!
Loaded question as there are many variables. How much are you looking for? What is your experience in the business previously, what collateral are you prepared to offer, do you have an income outside of the business start up- ie yourself or spouse (if appropriate). Banks want to know that you understand the business, have experience, can pay them back in worse case scenario. What percentage of the loan amount are you willing to put down- assume minimum 20% of loan amount. Credit rating, any outstanding legal issues, previous bankruptcy. That should help as a starter.
There are options to get up to $250,000 but you need a investment ready business plan with 5 yrs of projected revenues. You also need a 600 credit score and 3 years of tax returns 3 months of bank statements
Banks don't give growth financing. Could get financing for receivables (working capital needs). If you need significant financing to grow your business, check with investors - both debt and equity. Good luck!
Very difficult unless it's securitzed. That means you put up something you own as collateral. Your home, securities such as stocks and bonds work.
I would stay with smaller institutions and look to build up relationships. However nowadays, employee turnover rates in banks are very high. That said it has become more difficult to become a valued client in smaller banks as well as large banks. What is occurring is more and more business relationships are being created through internet portals. The system has become very user friendly and trustworthy as well as very very competitive.
Our office offers securitized loans through the Private Bank of National Advisors Trust if you are interested.
I work at Accion Chicago, a non-profit microlender that helps small businesses with financing and coaching.
We work with very small (micro) businesses, and are able to help both existing businesses and startups.
In assessing a loan application, we consider the same criteria a bank would, but we are more flexible due to our non-profit nature, for example:
1) Credit: we have no minimum credit score
2) Collateral: we are able to take personal assets (such as vehicles) as collateral
In regards to documentation, we would ask:
1) 3 months of bank statements (personal and business)
2) Previous year's tax returns (personal and business)
3) Pay stubs
1) 3 months of bank statements (personal)
2) Previous year's tax returns (personal)
3) Business Plan (including startup budget and projections)
I'd love to talk further if you have any questions. I can be reached by private message.
Dale provided a very thorough response to the question. I think the only thing I would add it that it is typically very challenging for a new company to get credit. Unless it has a history of profitability and some hard assets (which is not the case with startups), bank will lend based on the credit of the principle of the business.
Startups are typically funded initially with equity (i.e. money you put in or money others put in and it is at risk).
Money is the lifeline of any business, so whether you’re starting a business or running an existing one, securing financing is a major factor, especially for small businesses. Many budding entrepreneurs find the task daunting and don’t even know where to begin.
Here’s a simple yet practical guide on how to go about preparing to apply for a small business loan.
1. What criteria do banks look for in making small business loans?
Different banks or lending institutions may have different standards, but in general, in order to consider your application for a small business loan, banks will require:
The loan must be for a sound business purpose. For SBA-guaranteed loans, the business must be eligible based on size, use of loan proceeds and the nature of the business (no lending, speculating, passive investment, pyramid sales, gambling, etc.)
You and your partner(s) are of good character, have experience and good personal and/or business credit history
Ability to pay back the loan- reasonable to strong collateral (personal and business assets) is very important. SBA expects the loan to be fully secured, but we will not decline a request to guaranty a loan if the only unfavorable factor is insufficient collateral. And of course, owners must have personal equity investment in the business/skin in the game.
2. What information will you need?
Different lenders may require more or fewer documents, but in general, you will need:
Personal and business credit history
Personal and business financial statements for existing and startup businesses and as well as a projected financial statements
Strong, detailed business plan (including personal information such as bios, education, etc.)
Cash flow projections for at least a year, and
Personal guaranties from all principal owners of the business
3. How can you set yourself up from the beginning to make the process easier? (i.e. accounting systems, etc.)
Be prepared; be thorough; be truthful.
Choose your lending institution carefully. Larger banks tend to shy away from small loans as they are less profitable and take the same amount of underwriting and servicing. That doesn’t mean large banks do not make small loans; it is just more difficult.
Approach banks or lending institutions you have worked with or are a customer of
Explore community banks and Credit Unions
Talk to a lending officer and find out exactly what documentation they require
Be thorough, bring everything they ask. Many loan applications are denied or face unnecessary hurdles because of incomplete applications.
Even before you start gathering and organizing the information required by lenders to consider your application, you should educate yourself regarding business loans so you can understand and discuss intelligently with the lending officers when the time comes.
4. What is the typical size of a small business loan?
Small businesses come in many sizes, from a start-up of a one-person company to hundreds of employees, and their financial needs vary accordingly, so “typical” also varies. That said, in the banking industry the median small business loan is about $130,000 - $140,000 with highest around $250,000. SBA small business loans range from about $5,000 (microloans) to $5 million (largest guaranteed) with the average loan around $371,000.
5. How can you get financing to start a business since many banks want to fund growth?
Start-ups are probably the most difficult ventures when it comes to securing financing. Many start-up businesses seek financing from family, friends and credit cards. If the credit is sound, the business plan strong and you have enough personal resources to invest and collateral to guarantee, smaller, community banks and other community financial institutions and Credit Unions may consider lending you money.
Your best bet by far is SBA assistance. Begin by visiting SBA's website , where you will find a wealth of information not only on how to secure a small business loan but equally importantly, other services and training opportunities to help you succeed.
6. Are there associations that can help?
SBA works closely with a large network of partners that leverage SBA resources and are just one phone call away and ready to provide extensive help.
SBA District/Branch Offices– at least one in every state
SCORE– (approximately 300 chapters nationwide)
SBDCs – Small Business Development Centers; (approximately 900 locations nationwide; associated with higher education institutions (colleges and universities)
WBCs- Women’s Business Centers (approximately 100 educational centers nationwide)