How to Get a Small Business Loan
by Liz Hester, Staples® Contributing Writer
Launching a business takes money, and finding it can be a challenge when you’re just getting started. Check out these tips on how to get a small business loan from banks and other lenders so you can get the financing you need to open or grow your business.
The Building Blocks
Banks want to see your business plan and that you’re generating cash, or at least know how you’re going to.
“Even if you’re a start-up, having accurate and current financial statements on the business is meaningful,” says Craig Street, Small Business Administration lending director for Columbus, OH-based Huntington Bancshares, the third-largest SBA lender.
The industry standard is to see two years of cash flow and financials, something hard for brand-new businesses to produce. So Street says understanding your legal structure (limited liability company or sole proprietorship) and the process of setting that up demonstrates knowledge, which can add to your credibility when applying for a loan. He recommends having clear answers for some of the “what if” questions, such as:
- How will you make money if costs rise?
- How will you offset a drop in demand?
- What will you do if there are delays for things like equipment delivery?
Susie Leinbaugh, a senior vice president at Chase Business Banking in Dallas, TX, says it’s smart to “invest in good controls and good financials from the beginning,” especially for start-ups. This includes not taking too much money out of the business — like salaries or expenses — in the early days.
“The not so obvious piece [we look for] is the quality of the balance sheet and how conservative they are in putting equity back into the business rather than taking it out,” Leinbaugh says. “That builds a solid foundation.”
Banks also often require collateral, such as real estate or a trust account, to secure small business loans. Even if you don’t have the track record or personal assets to back the loan, meet with the bank anyway. Small business bankers can use community connections and offer advice on where to look for alternate financing.
A Helping Hand
The SBA offers several loan programs for initial and growth financing. Also, contact your state’s SBA office for a list of bankers and nonprofits that offer start-up loans in your area.
That’s how Chris Runyan, owner of six Game X Change stores in Connecticut, obtained the initial financing to open his first store in 2010. He worked with an SBA micro lender, the Connecticut Community Investment Corporation. These smaller micro-lenders can give you enough cash to get started until you’re ready for a larger bank loan. “Go to the SBA Web site, and go through it,” he recommends. “They have it spelled out for you. There are a ton of forms, but you have to have all that put together.”
According to Street, working with the SBA “helps us to say ‘yes’ more often to more customers. We like it because the SBA loans become a strategic tool we can use.”
Action Items for Getting Small Business Loans
These five tips will help you put the best case forward for getting a loan for your business.
- Develop accurate financial statements and a complete business plan before asking for financing. Most banks like to see two years of statements.
- Implement good financial practices and controls from the beginning, including tracking key financial ratios.
- Re-invest as much money into the company as possible to show commitment and increase financial viability.
- Establish a relationship with your banker. Even if he can’t make a loan right now, your banker can connect you with other sources of financing in the community and be there for you when you need additional capital to grow or expand.
- Use SBA resources and lending programs to help you get started or expand.
No matter if you’re a start-up or looking for growth capital, knowing how to get a small business loan by creating a strong foundation and solid financial statements will make your business easier to finance.