Steps to a Small Business Loan

Getting a small business loan is relatively straightforward. Like any other loan- car, home, etc., it comes down ability to repay, ability to collateralize, and creditworthiness. Unfortunately, for business owners showing ability to repay it is not easy as showing current check stubs. Nor is collateralizing as easy as a car or home loan which self-collateralizes. But just as there is mechanisms in place to make car and homes loans, there is a system for business loans.

The first order of business is to make sure the home front is in place. That is the personal credit of the principal owners of the business is good. Then the credit of the business needs to be in good standing also. Many times credit applications for businesses want up to ten credit references. The next thing is to make sure the financials are looking good. The balance sheet, the profit and loss statement, and the cash flow statement should all be in order.

The financials lead to the next step and that is developing a business plan. A business plan lays out for lenders how a business intends to use the funds it receives and how it plans to increase sales to repay the money. Though there is a narrative section, what is most important is the projected financials. That means that a business should present two forms of financials. A lender will receive from a business past performance financials and projected financials based upon the capital it receives.

These steps will show ability to pay and creditworthiness, but it will not present how the business will intend to collateralize the loan. The business will have to present that option. Businesses could use real estate, vehicles, inventory, equipment, accounts receivable, or even personal assets of the owners should the business decide. Except for real estate most other options are considered lesser but it does make the lender feel more comfortable that the business has something to lose.

Should a business not be able to show an ability to pay, have creditworthiness, or have collateral getting financing could be difficult. That is one reason it is always good to secure financing or a line of credit when times are good for a business. Seemingly, when a business needs it most it may not be there. The old adage is true, banks only want to lend money to people who do not need it.

There are options for businesses that may have difficulty getting financing but the price is often high. Sometimes an investor can help but will want part ownership. Factoring is another option, which is some who prepays on accounts receivable. Downside to factoring is the rates are very high, one could receive only 70-80% of the value of their accounts receivable. Finally, there is community based lending but this is often done as microloans. Microloans can be defined as loans under $35,000 dollars. This may not be enough for many existing businesses to truly expand. Still, it nice to know that there may be other forms of capital a business can acquire.