Most small business startups need financing during the early stages of their development. A bank will want to see evidence of cash flow and a solid business plan that will give them confidence that the loan will be repaid.
Funding is never easy to find, even for those larger businesses. Knowing the pitfalls to avoid when applying for a bank loan can increase your chances of getting the loan you need. Here are a few ideas from bankers who lend to small businesses.
Your Credit Counts
Even if you formed an LLC or plan to in the near future, your personal credit is a major driver when applying for startup or small business funds. Bankers are aware that although your business may be legally separated from your personal finances, in a small business, you’re the person handling all of the financial obligations of the company. If you don’t skillfully handle your own finances, you likely won’t do that for your business either. If you have plans to open a business sometime in the future, make sure your credit is excellent.
Wrong Loan Type
How long do you need the funds? Short term loans are used to make payroll, fund short term obligations until a contract is paid, or other needs your business has that won’t be needs for a long period of time.
If you plan to use the funds to purchase machinery or another capital purchase that won’t be repaid for a much longer period of time, you need a long term loan. Since each type of loan will be evaluated differently, having to reapply for another loan type may take extra time.
A bank will want some form assurance that you can pay the loan back and in the event that you can’t, they’re going to want a means of getting at least part of their money back. That’s the collateral you put up to guarantee the loan. If you have no collateral, the chances of you getting a loan are slim. Since your business is so new, pledging your business likely won’t work. Think about how you will guarantee the loan before applying.
Getting a bank loan for your business startup is still challenging. The United States Small Business Administration has guaranteed loans that could make it easier for you to qualify for a loan. Go to their website to learn more.