Ideas are cheap – taking action is what makes them expensive. According to the U.S. Small Business Administration, more than 627,000 new businesses are started each year. That’s 627,000 entrepreneurs with unique visions for their businesses and all of them looking for capital to get started.
As any entrepreneur eventually realizes, capital is hard to come by in the beginning stages of a startup. Entrepreneurs should expect to pull out of their own pockets for at least the first year before they start to turn a profit. Depending on startup costs and the way the business measures profit, it could take two to five years for a business to stand on its own.
What a business needs to push it into the profitability stage is extra capital. Business loans are strong and viable options for some small-business owners, but they can be difficult to obtain due to the risk involved.
Most entrepreneurs are hesitant to apply because of the low acceptance rate, but with some planning, a vision and a commitment to the cause (all qualities entrepreneurs tend to have in spades), small-business loans are not out of the question.
Here are three things borrowers need to do to secure capital through a small-business loan.
1. Plan ahead. Two years’ worth of cash-flow records and tidy personal finances will put borrowers in a good position to receive a loan approval. The two-year rule is in place to protect both the lender and the borrower, as returns from the first two years of a business are indicative of how well it will do in the future. Two years is also enough time for the borrower to create, test and edit a well-crafted business plan before seeking money to back it. Lenders want to see ideas grounded in practice.
It’s not enough just to say you need working capital for general business operations. A business plan needs to explain in great detail how money will be allocated to each area of the business, how operations will be managed and how its product or service will be marketed. To write a well-crafted business plan, borrowers can visit SBA.gov for a guide, or simply perform a Google search for business plan templates.
Another easily forgotten part of planning involves making the proper connections to be successful. Entrepreneurs tend to forget they will need an accountant and an attorney who can help them set their businesses up the right way. Entrepreneurs should spend time surrounding themselves with experts, joining online groups for other small-business owners and attending seminars and workshops.
2. Avoid the common pitfalls of loan applications. Small-business lenders have seen it all – from promising business ventures to half-baked ideas – so borrowers should do their research before they step foot in a loan office. Market and competitive research will help borrowers figure out where their idea lies in the grand scheme of the industry they are entering and, most importantly, reveal to them their real customers.
The borrower’s personal finances play a large role in their loan approval or denial. Lenders will look at a credit score, tax returns, outside income, savings and all borrowing history.
Knowing this, borrowers should clear up any issues with their personal finances before seeking a small-business loan.
3. Look to other resources. Commercial loans through traditional banks are not the sole way to find capital for a business. There are nonprofits, angel investors and other loan options available. Visit your local SBA office, or go to SBA.gov to surf through their guides and resources. Another helpful tool is SCORE, which places borrowers with a mentor who can help write a business plan, look for capital and learn skills to become an effective small-business owner. Business programs at local universities also are excellent resources.
In general, the best tip for entrepreneurs is to do their homework.
The deeper they throw themselves into learning about not only the desired industry but also running a business, the more likely it is they will receive approval on a business loan.
