One of the most difficult tasks you will probably face as a small business owner is to obtain money, (either through a loan or investor funds), to operate your company. When you start your business, you may be able to use your personal savings; you may also be able to tap friends and family for some investment. However, most likely at some point you will have to go outside your immediate circle and into the market place and obtain a small business loan. It is important to realize that since banks consider small business loans risky, you have to be prepared before you approach your loan officer. Here are the issues the bank will consider-
- Your personal credit history-You may thing that your personal credit history has nothing to do with your business but you would be terribly wrong. The reality is that your personal credit history plays an enormous role in your ability to attract financing for your business. Banks and other financial institutions will look closely at your credit history and credit score before lending you any amount money. A good first step is to obtain your credit reports from all three main credit reporting agencies before you apply for any loan.You will want to make sure that there are no errors or omissions on them. You also want to make sure that you are able to explain any late payments or defaults on your credit report.
- Know how much money you will need-You will need to have a pretty good idea of how much you will need in assets to start up your business.This includes such things as inventory, money for payroll, supplies, real estate, manufacturing expenses, and any miscellaneous assets. Financial experts advise asking for more money then you think you will need as small business owners tend to typically underestimate the amount of capital it takes to start a new business.
- Have a good business plan-While some banks now loan money on a credit scoring basis other banks will want to see a fully written business plan.The business plan must be able to explain to the bank what the business is and why it is feasible in your area. You must be able to make your case both in words and in numbers. Some banks even require at least five years of forecasted financial statements before they will make a loan. If they do you must look five years out into the future and try to estimate your sales and expenses for those five years. While this is not an easy task, you can base your estimates on similar businesses in your area and economic variables such as inflation rates. You should understand that developing a business plan will require some research on your part, and you may want to hire a financial planner or an accountant to help you.
- Know how profitable your business will be-Your job is to convince your loan officer that your business will be profitable. You will use your forecasted financial statements for this task. The loan officer must be persuaded the business will be profitable in order to be confident that you will be able pay back the small business loan in a timely manner. The bottom line is to focus your efforts on showing how profitable your business can be.
- Have a back up plan-One of the last questions the loan officer may ask you are what you are going to do if your loan request is not granted.It is important to have a good answer prepared for this.You want to remain excited and positive about your business while explaining to the loan officer that you will simply try other lenders and programs that cater to small businesses until you find someone who will finance you.