You have a vision, a plan, and the motivation to start your own business or take your current one to the next level. Everything is ready to go, all you need is money. For many entrepreneurs, small business loans are the key to fulfilling short and long term goals. So how do you get a small business loan? Is it difficult? Do you need to meet certain requirements? If you’ve asked these same questions, then you’re in luck; that’s exactly what we are going to discuss.
Have a Plan
When it comes to securing a small business loan, half of the battle should be fought with strategy. One of the best ways to get all your financial ducks in a row is to devise a solid, well-thought-out business plan. This will show any potential lenders that you’ve done the research and completed your homework.
Here are a few general things you should keep in mind:
- What kind of business are you starting and what are your long and short term goals?Before requesting a loan, you’ll need to be able to concisely define your business to a potential small business loan lender. What is your product and who does it serve? What is your projected revenue? What tactics and strategies do you plan to employ in order to reach that revenue mark? You should be able to confidently answer those questions before you step foot in a lender’s office.
- For what do you need a loan?When it comes to requesting a small business loan, you’ll need to have a detailed list outlining what exactly you need the money for. Working capital costs, equipment and operation costs, or long term development costs all constitute good reasons for requesting a small business loan.
- However, if you’re seeking a loan to pay down surmounting debt, recoup for poor performance, or fulfill payroll obligations, then you may want to consider alternative means of support.
- How much money do you really need?Next, you’ll need to determine how much you need. Though this number may not be exact, you should be honest and realistic with your estimates. If you overestimate, lenders may shy away; however, if you underestimate, you may find yourself in tight spot far too early.
Research Your Credit History and Know Your Score
While it may seem redundant and overstated, it’s absolutely essential to know your credit scores. Obviously, lenders put a significant amount of weight on your credit history. Knowing where you stand can help you evaluate potential lending opportunities.
Beyond that, knowing your credit history can help you identify and address weaknesses before you even go to a potential lender.
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Decide Where to Get Your Small Business Loan
Determining where to get a small business loan can depend entirely upon your needs and credit history. For owners looking for small business loans, the following options should be considered:
- Bank Loans: When it comes to loans, most people immediately think of bank loans. Banks are often your best bet when looking for loans because their access to checking and savings deposits often results in the best rates. However, banks are slow. You may not get your funding for months. With those two factors in mind, if you have a good working relationship with a community bank or credit union, it’s in your best interest to start there.
- SBA Loans: The Small Business Administration offers government guaranteed loans through various lenders, like community banks or online through smartbiz.com . SBA loan rates rival bank rates but also tend to be document intensive and the approval process make take awhile.
- Credit Cards: If your business doesn’t crack the high standards of a bank or the SBA, but your financial needs easily fall into your approved credit limits, then a credit card can act as a feasible means for a small business loan.
- Alternative Loans: Loan alternatives such as peer-to-peer lending, merchant advance loans, or loans from non-profit organizations can get you the money you need. However, be sure to thoroughly read through your term sheet and evaluate the true cost of the loan (APR) before accepting an offer.
- Personal Sources: Of course, loans from your personal savings or from friends and family can also help you reach your business goals. However, we all know the adage about mixing business and family; for that reason, it’s always advised to tread lightly in this area and only do what you and the lender feel completely comfortable with.
Getting a Small Business Loan with Bad Credit
Opening or maintaining a business isn’t easy, specifically if you have bad credit. Though certainly not unheard of, small business loans for bad credit businesses can be challenging to obtain.
Fortunately, there are options. While your credit score is important, SBA cites these factors as ones that can help you get a small business loan even with bad credit:
- Bank Deposits: Your history of revenue as seen through your banking history (i.e. deposits) can be used to help secure the funds you need. Typically, a lender will approve a small business loan for 10% of your annual gross.
- Credit Card Sales: In this situation, a bank will review your credit card sales and extend a loan with the expectation that they will receive a certain percentage of your monthly credit card sales. Always make sure you can maintain the monthly deduction before you commit.
- Credit Partner: This type of loan requires you to partner with a business that will effectively co-sign for your loan. This does carry risk for the partner; however, as long as you don’t default on the loan, their credit history will stay clean.
Businesses with bad credit can consider alternative options such as crowdfunding websites like Kiva Zip, which allows business to crowdfund a loan from community members who believe in their business at 0% interest rates. This option allows business owners to kill two birds with one stone — validate their product in the market while raising funds.
Find out more details about small business financing requirements and available options to business owners .
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