- For your first small business loan, consider traditional bank loans, government loans, merchant cash advances, business lines of credit, business credit cards, and other short to medium term loans. .
- When applying for your first small business loan, you should also create a budget, compare lenders, check your credit rating, and determine the financing you need.
- You should also consider working with your accountant to make sure that all the appropriate documents, such as the tax return and financial statements, are in order.
- This article is for small business owners who are considering taking out their first small business loan.
Is this the first time you have ventured into the field of small business lending? Obtaining a small business loan is only one of the first steps in starting your business. Good financial planning, however, is essential to your success.
There are two key things to keep in mind as a beginner in small business lending. If you’re looking for a small business loan, how you present your business idea, business plan, and financial forecast can make the difference between getting investor or bank approval or not. But once you get a business loan, the way you run your operations and where that money goes can make or break your whole business.
Types of loans to consider
Some of the types of loans – also known as debt financing – that you should consider for your first small business loan include:
- Traditional bank loans. These are more difficult to obtain, but generally offer more favorable terms.
- Government loans. This includes Small Business Administration (SBA) loans, which may have lower rates than bank term loans.
- Cash advances from traders. You pay off these loans with a portion of your debit and credit card sales. These are paid in daily, weekly or monthly installments and usually have a high APR.
- Business lines of credit. You can use lines of credit repeatedly until they run out or you no longer need the funds.
- Business credit cards. You pay them back just like you do with a personal credit card.
- Long term loans. Usually offer larger amounts of finance that you can repay over longer periods of time.
Key to take away: The types of first small business loans you should consider are traditional bank loans, SBA loans, merchant cash advances, business lines of credit, business credit cards, and long term loans.
Dos and Don’ts of Your First Small Business Loan
From creating a budget to managing costs, there are several steps you can take to get the most out of getting and managing small business loans. Holly Nicholas Signorelli, Certified Financial Planner and CPA, advises aspiring entrepreneurs and small business owners to keep expectations realistic. Based on over 20 years of experience, Signorelli shared the dos and don’ts of getting started small business loans. [Read related article: Applying for a Small Business Loan? Here’s What You’ll Need]
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1. Create a real budget.
About 90 percent of the time, clients arrive with a huge budget made up of millions of dollars in profits, Signorelli said. But when you start to go through the line items, there’s no real backing up to justify the numbers. Instead, there is always some hype around the product, the market in general, and most importantly, the “potential”. Banks and investors don’t want to buy your idea; they want to make a profit, Signorelli stressed. In order for them to believe in your idea, they have to believe that there is a profit. With a few exceptions, they won’t invest in your idea if it doesn’t make sense or if it sounds too good to be true, Signorelli said.
2. Have budget references.
Make sure every line item has a reference behind it, Signorelli said.
“Real numbers, real research – get down to business,” she said. “For example, if you provide a service and your budget indicates that you can maintain XX clients per month for an amount of XX dollars, the price of the service will be easy to display, given the average price of that service in your geographic area. . “
However, you need to justify why customers would come to you versus the competition.
“It’s ‘low and dirty’, and you can’t be too detailed; be brief and concise with a backup,” Signorelli said. “Think about it: when you read a budget, you don’t want someone to be surprised at their pipe dream. . “
In other words, you want the details, but you want them to be short and to the point.
3. Don’t overestimate your income.
“In 20 years, I have never seen a budget where the income was as high as expected in the first year,” Signorelli said.
This is essential, because the lack of income in the first year is the cause of 80% of small businesses failing, she said.
“Once you’ve budgeted, go back to it and cut your income 25 to 50 percent less than your due diligence caused you to put on the report,” Signorelli advised.
4. Don’t underestimate your expenses.
“There are things you underestimated, no matter how meticulous you were, and there are things you completely forgot,” said Signorelli. “Just like income, you have to go back to your budget and take your expenses and increase them by 25-50%.”
5. Have extra funds.
As a small business owner, you need to have enough savings to make sure you can pay your bills in the first year, Signorelli said.
“It was hard enough getting your loan, but I promise you six months later, when you’re not profitable, no one is going to want to lend you more money to get you through the next six months.” , she said.
6. Don’t stress about finances.
To get through the first year and make a profit, you need to focus on marketing and building a business, so you don’t need to worry about finances, Signorelli said. To come forward and start a business, you, the owner, must believe in yourself and your new small business.
With the right budget, you’ll get the right amount of money from the right investor, giving you the freedom and confidence to focus on and make your dream come true, said Signorelli.
7. Don’t compare lenders.
No two lenders – not even lenders who offer the same type of loan – have the same terms. If you find two lenders willing to offer you a loan amount that is favorable to your budget, one of these loans is likely to have a higher APR than the other. The high APR loan, however, may have a shorter term, which means the burden of paying off your debt lasts longer with the other lender. You should also consider the lender themselves – go through their customer reviews and determine the level of customer support you will receive. A trusted lender ready to help you may be better than a less reputable lender with better loan terms.
8. Check your credit score.
With a low credit score, your chances of getting approved for a loan drop dramatically. Minimum credit score required varies depending on the loan type. This can range from 550 for most merchant credit advances to 680 for traditional or SBA bank loans. If your credit score is too low for the small business loan you desire, you can take steps to potentially increase your credit score.
9. Decide how much financing you need.
Knowing how much financing you need is important so you don’t have to pay prepayment charges when paying off your loans. Some lenders charge a prepayment fee if you pay off part or all of your loan before the end of your loan term. For example, if you take out a loan of $ 20,000 when you only need $ 5,000 and then try to pay off the extra $ 15,000 after realizing that you only need $ 5,000 , you will be charged a fee that you could easily have avoided.
10. Gather your papers early.
Applying for a loan is rarely as easy as completing an application. This usually requires you to complete large amounts of paperwork as well. So, it’s never too early to get all your documents in order. These documents can include tax returns and financial statements. You may want to speak to your accountant to determine what you will need based on the loan you choose to apply for, but it never hurts to compile everything possible to be ready no matter what.
11. Learn from your mistakes.
Yes, it’s good that you made mistakes, as long as you learned from them.
“I worked for a great CPA right out of college for five years learning everything I needed to know to run a business,” said Signorelli. “I still made mistakes the first few years, but the basics were laid and most importantly, it was not an option for her not to succeed. It was my life, and whatever you do must be your dream. that will move you heaven and earth to make this happen. “
To remember : When applying for your first small business loan, create a budget, compare lenders, check your credit score, determine how much financing you need, and more.