How to get a business loan
Where to find business loans for your small business
Over 99 percent of all business entities in the US are small businesses, according to The SBA Loan Book: The Complete Guide to Getting Financial Help Through the Small Business Administration. These businesses represent over half of the private workforce and the private-sector output and over 40 percent of all private commercial sales in the United States.
How do so many small businesses get started? It all begins with the right type of financing. Whether you're just starting up or you're expanding your existing business, you need money to get rolling. This guide will help you figure out the type of loan you need for your business and will look at the step-by-step process of securing a business loan:
Determine the type of loan you need
Look in the right places for a business loan
Find help applying for your loan from business professionals
Talk to your preferred lender ahead of time
Write and present your business plan
Who this guide is for
This guide will be most useful for entrepreneurs who need funding for their startup businesses, and I also include information for expanding businesses. This guide will also be useful for minority startup and expanding business owners.
To find out the best ways for new business owners to secure loans, I consulted with experts who have a wide range of experience with funding businesses including Jared Hecht, CEO of the online lending website Fundera, David J. Hall from the Small Business Association, Hal Shelton who is a SCORE mentor and author of The Secrets to Writing a Successful Business Plan (Summit Valley Press 2014) and Larry Conley, Senior Vice President and Specialty Finance National Manager for Chase bank.
I also took a free online course called “Finding Money for Your Business,” which I found through the Small Business Development Center of Oklahoma. This three-hour online course walked me through the process of finding money to start a small business. In addition to these resources, I read 17 articles and studies on funding small businesses.
Common lending terms defined
With all the options available for business financing, it’s easy to get confused by terms. Here are common terms you will see associated with getting a business loan. I found information on all of these terms from the online course I took entitled “Finding Money for Starting a Business.”
A lender is someone who lends you money through debt capital, also called loans. Lenders look for low-risk opportunities and require businesses to put up a substantial amount of collateral as a way of securing a loan. Because loans are low-risk, the lender doesn’t charge a substantial interest rate.
An investor looks for a more high-risk opportunity to get a higher reward and will put their money in established businesses that have the potential for high growth. Investors generally expect to be involved in the business in the form of a seat on the board of directors or some other role in which they have a say in how the business is managed. For the most part, investors want to get in on a company while it is in its early growth stage, and they get out once the business has reached a certain level of growth.
Investors tend to fall into two categories: angel investors and venture capital investors.
Angel investors are high-net-worth individuals or small group investors who have experience in businesses and are excited to help a business grow. Their range of investment can stretch from $20,000 to $1,000,000. You can find angel investment clubs regionally.
Venture capital investor
Venture capitalists tend to start investing at $1,000,000, and they prefer to invest in high-growth and high-risk businesses. High-growth investment means the venture capital investor would see a return in 3-7 years by selling the company or going public. Venture capitalists tend to require a large amount of equity in your business, including a position on the board of directors.
Capital is essentially wealth in the form of money or assets that you, as the business owner, can bring to the table when you’re seeking a loan or investor. This can be in the form of personal savings, credit cards and loans from friends.
Banks will only lend money when the business owner can prove they have enough capital to bring to the table. “Banks do not consider themselves to be the first line of defense,” says Shelton. Shelton explains that business owners should put up their own capital first, then get money from friends and family before heading to the bank for a loan.
Before you can get a traditional bank loan, you need to have collateral, generally in the form of your house although other assets including land, cars, watercraft, motorcycles and equipment that has a title of ownership can be used as collateral. Understand the risk involved with your business venture before you put up collateral–the bank will take your house, car or whatever else you put down if you default on your loan. Make sure you have an accurate assessment of what your collateral is worth before you apply for a loan so you don’t wind up unpleasantly surprised when your bank assumes it’s worth today’s market value, not the value that it was when you bought it. If you don’t have an asset to use as collateral or are uncomfortable with the idea, then you’ll want to seek out a source other than a bank for your business lending needs.
Where to find business loans
You don’t need to finance your business using just your personal savings and credit (although there are plenty of businesses who get started that way). Here are some places to explore for your financing:
Your local bank is the best place to start when you’re looking for a business loan. Find out what your bank has to offer before you go anywhere else. You can even stop in before you actually need a loan to find out what you would need to do to qualify for a loan with them.
Conley advises entrepreneurs to “start becoming an established customer” of a bank long before you approach a bank for a loan. A well-established relationship and history of timely payments will make a good impression. If you haven’t already done so, work on forming a relationship with a local bank.
Websites like Fundera serve as a marketplace for business owners to find lenders that match their business needs. The company works with every major lender in the United States and matches business owners with an advisor who can help them find the right lender for their business. You can also seek out online funding on your own. Read through reviews on ConsumerAffairs to find an online lender that matches your needs.
According to Hecht, online lenders tend to stay away from lending to startup businesses: “The longer you’ve been around, the easier it is for you to get funding from an online lender.” Even though his business is based on online lenders, “we’re not anti-bank,” says Hecht. He advises every entrepreneur to begin their financing process by going to their local bank first to see what they have to offer.
Small Business Association
SBA.gov is the website for the Small Business Association. Founded in 1953, the SBA functions as an independent agency of the federal government whose mission, according to their website, is “to aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation.” One way the SBA helps small businesses is by offering financial assistance through three programs: the guaranteed loan program, surety bonds program and venture capital program.
The SBA also has a microloan program, in which loans are available for small businesses and certain nonprofit organizations in smaller amounts ranging from around $10,000 to $50,000, with the average loan amount at $13,000. You will need to work with your local SBA approved intermediary to apply for an SBA microloan.
Startups have a hard time getting a loan. Their lack of history makes them a high risk for lenders, which is why a lot of entrepreneurs turn to crowdsourcing their startups. This can be an effective way to gain support for your business, but it is also risky. To be successful, follow these three strategies:
Talk about the problem you are solving: Focus on how your business will benefit those who invest and/or the community or world as a whole. People are more likely to contribute if they can see a direct benefit that will result from your business.
Specify how much you need: Your financial goal should specify not just an amount but how that amount will be used. Start with small goals, and build up as you go.
Have some backers already on board: Talk to your family and friends before your crowdfunding project goes live to ensure you already have some money banked. People are more likely to fund a project that has support.
Where to find business loans for minority-owned businesses
There are a lot of programs out there that help women, members of racial minority groups and people living in rural areas secure the financing they need to successfully start and run their business, which has contributed to the continued rise of successful minority-owned businesses.
SCORE.org conducted research in 2015 that studied business growth in the United States between 1997 and 2014. They found a 67.8 percent increase in the number of women-owned businesses, compared with a 34.4 percent increase in men-owned businesses. The study also found a huge growth in the number of businesses run by women of color, up an incredible 215.7 percent, with revenues increasing by 193 percent. Latino-run small businesses also saw a massive increase, with small business ownership growing at a rate of double the national average.
If you are a member of a minority group, you might be eligible to seek financial help from one of these five places that specifically help minority-owned businesses get started.
1. Minority Business Development Agency (MBDA)
Good for: Members of minority groups who need guidance with small business financing and startup
The MBDA does not directly loan money, but it does provide resources for members of minority groups who are trying to start a business. They have business centers around the country where entrepreneurs can seek mentorship and guidance as they start their business. These business centers are located in areas with a high amount of minority-owned businesses. You can go to MBDA.gov/businesscenters to find one in your area where you will be advised on everything from writing a business plan so you can apply for funding to marketing your business.
2. SBA’s 8(a) business development program
Good for: Entrepreneurs who are members of socially and/or economically disadvantaged groups
The Small Business Administration (SBA) is committed to helping small business owners get the funding they need to successfully start and run their business. The SBA is not a direct lender but rather sets guidelines for loans made by their partners. The SBA guarantees loans for select businesses, meaning they agree to pay the loan off if the owner defaults, which makes it easier for entrepreneurs to get funding.
One of their loan programs is the SBA 8(a) business development program. According to their website, SBA’s 8(a) business development program is specifically dedicated to providing business assistance to entrepreneurs who are members of a socially and/or economically disadvantaged minority group who need help accessing mainstream economic capital. This program is divided into two sections and requires a nine-year commitment. The first four years are dedicated to development, and the remaining five years are a transition stage.
Small business owners who participate in the program benefit by receiving mentorship, marketing assistance, specialized business training, access to high-level executive development and access to a number of funding opportunities including access to surplus government supplies and property, SBA guaranteed loans and bonding assistance.
3. USDA Rural Development loan program
Good for: Farmers, Native American tribes, cooperatives, companies, public bodies and non-profit agencies run in a rural area
While they might not be as plentiful, businesses in rural areas are just as important as businesses in urban areas. The USDA’s Rural Development loan program is dedicated to helping businesses in rural areas get started and grow. Like the SBA, this loan program does not lend directly but rather guarantees loans, which allows entrepreneurs access to a larger line of credit than their personal credit would allow so they can successfully build their business.
Eligible funds received through this program can be used for business conversion, repair or enlargement; the purchase and development of land or buildings; the purchase of equipment; debt refinancing as long as new jobs will be created as a result; and/or business and industrial acquisitions when the loan will save and/or create jobs and/or the loan will keep the business open.
Funds cannot be used for lines of credit, owner-occupied housing, projects involving over $1 million and include relocating at least 50 jobs or agricultural production. Funds also cannot be used to fund certain businesses including golf courses, casinos/racetracks, churches or church-controlled businesses, fraternal organizations or lending/investment companies.
4. Plum Alley
Good for: Women entrepreneurs; businesses that include women in the C-suite and/or as founders
Plum Alley was founded by Deborah Jackson, who had over two decades of experience raising capital for businesses, in 2012 as a crowdfunding platform for women-run businesses that needed extra funding. In 2015, Plum Alley Investors emerged as a way to connect women-owned businesses with investors who want to invest specifically in women-run businesses. Plum Alley is unique in that their investors are dedicated to investing in women-centric businesses, and they help women gain access to the capital they need.
To ensure success for both entrepreneurs and investors, Plum Alley requires businesses that crowdfund to secure at least 30 percent of their goal during a one-week “private” campaign before opening the crowdfunding to the public. This ensures investors that the business already has some financing, making it more likely they will reach their goal since research indicates that businesses who get 30 percent of their funding goal within the first 48 hours of crowdfunding have the most success.
Good for: Veterans of the United States military
StreetShares is dedicated to helping U.S. military veteran entrepreneurs get funding for their small business ventures, which is why it is a good place to look if you want to start a small business and you’re a veteran. It’s free to see if you qualify for a loan, which is offered in terms of three months to three years, for up to $100,000. Businesses must be at least one-year-old or have at least $100,000 in revenue to qualify. You also must be a U.S. citizen and have decent credit.
Loans are made by StreetShares investors, who bid on loans for companies. The more appealing your business idea is to investors, the better your loan options. It only takes a few minutes to see if you qualify for a loan. Once you are approved, your loan will get bid on by competing investors. The competition process lasts from one to four days, and then it takes another day or two for the money to get deposited into your account. In total, the process of getting a loan through StreetShares takes about a week.
Steps to getting a business loan
Before you can get a business loan, you need to convince your lender that your business is worth their investment. To do that, you need a solid business plan, some upfront capital and a budget. Here is a step-by-step guide to getting a business loan from a bank:
1. Figure out why you need a loan
Your answer needs to be more detailed than simply “I don’t have any money.” What specifically will you be using the loan for? Start up? Day-to-day management? As a safety net? To answer this question, you will need to spend a lot of time figuring out your budget along with the amount of money that you realistically can put up as capital. Take your time with this step since it will have a big impact on whether or not you actually get a loan that can cover your expenses.
2. Know which kind of loan you need
Your answer to the first step will determine what kind of loan you need. If you need money for startup, you will likely be looking at more localized funding including loans from family and friends, taking out a personal line of credit and crowdfunding.
If you are an established business that needs money to manage your day-to-day expenses (payroll, rent and other bills), you can take out a line of credit, a short-term cash flow loan or accounts receivable financing.
If you are an expanding business and need money for relocation and/or renovation, you’ll be looking for a term loan, which is essentially a lump sum of cash that will be paid back within a set amount of time. Depending on what you expect for the long-term when you are in a growth stage, you may be looking for investors rather than lenders at this point.
3. Talk to the bank ahead of time
Shelton recommends meeting with a loan officer a few weeks to a month ahead of time to personally meet the loan officer and find out if the bank is currently interested in lending the type of loan you are looking for: “You want the loan officer to be on your side,” Shelton explains, because the loan officer usually doesn’t have the approval level to say yes to a loan.
The loan officer takes your application, and in some cases, all of the applications she has received during a set time period, to a credit committee, and the committee determines whether or not a loan gets approved. This is why it’s so important to have the loan officer on your side–you need someone standing up for you in front of the credit committee when you can’t be present.
In addition to building a relationship with the loan officer, you want to find out what exactly they need to see in your business plan. Go in with your plan already written and numbers in your head so you can confidently and intelligently discuss your business model, and ask the loan officer what specifically they want to see from a business plan. Take the time to revise your current business plan to match what the loan officer wants before you go back to the bank for your actual pitch.
4. Go to the bank with your business plan (and a buddy)
Entrepreneurs need to “walk into the bank feeling good,” says Conley. You want to demonstrate confidence to the lender, who needs to be convinced of your business’s merit and of your belief that your business will be able to pay off the loan.
To that end, “take a friend,” advises Shelton. “That way there are two sets of ears listening to what you have to say.” SCORE mentors will occasionally accompany budding entrepreneurs when they go to the bank for moral support. You can also take along your accountant.
Finding help for your business loan
Securing a business loan is a multi-step process, and fortunately, there are resources available to help you ensure that you have your bases covered. Here are some resources to check out before you actually apply for a business loan:
Get matched with a mentor who has experience building a business by visiting SCORE.org. SCORE is dedicated to helping small businesses develop and thrive through mentorship and training programs. SCORE mentors can help small business owners write a business plan, determine the type of lending they need, figure out the best bank(s) to approach for a loan and prepare to meet with a loan officer.
The Small Business Association (SBA) has several financing programs available for businesses, including startups, and works with banks around the country to guarantee loans so small businesses can secure bank loans and get up and running quickly. The SBA works with entrepreneurs who do not have great personal credit, making it more likely that they can still start their business even with a less than perfect credit score. Visit SBA.gov to find out more about how the SBA can help you and get information for your region.
Small business development centers
Small business development centers work on a local level to help small business owners and aspiring entrepreneurs get the assistance they need to build and grow small businesses by providing workshops, classes and counseling for entrepreneurs. Find information about your local chapter at AmericasSBDC.org.
Other small business owners
When it comes to finding a lender for your small business, there’s no replacement for word-of-mouth recommendations. Talk to other small business owners in your town to find out the good (and the bad) about local banks, loan officers and investors.
Business loan checklist
I’ve covered a lot of information in this guide. To help you figure out your next move, here’s a checklist of things to do when you’re getting ready to fund your business:
One year (or more) ahead of time:
Establish a relationship with a bank by opening a checking and/or savings account and getting to know the bankers who work there
Repay your personal debts
Don’t take out any more personal lines of credit
Visit your local Small Business Development Center’s website for free resources related to starting and/or funding your business
Save 10 percent to 20 percent (or more if you are able to) to use as capital
Get experience in your chosen industry or field if you don’t have any
One to three months before you meet with a lender:
Know how you will use your loan so you can explain your lending need
Figure out details including what kind of collateral and equity you have
Update your resume
File your personal tax returns
Talk with local business owners about their lending experiences
One month to a few weeks before you meet with a bank:
Contact the SBA to see if you qualify for a guaranteed loan
Meet with your bank’s loan officer to find out their specific need for your business plan
- Write your detailed business plan per your loan officer’s specifications
What to avoid
There isn’t just one way to get a business loan, but there are a few ways to make sure you never get one. Here are some common mistakes to avoid:
Putting financials at the end of your business plan
Small business owners are passionate about their ideas and tend to get excited about the little details, leaving the financials alone in the back of their business plan. It’s a mistake to put your financial information as an appendix or otherwise in the back because “it says that finance is not important,” advises Shelton. Your lender wants to feel comfortable that you have a plan for managing your finances, including paying back your loan, so keep your financial information up front in your business plan.
Applying to every lender in town
Every time you apply to a lender formally, they are going to pull your credit report. When your credit report gets a lot of inquiries, your credit score lowers, making it more unlikely that you will get a loan. You should apply to one (two at the most) lender at a time and only move on to another lender if you get rejected.
Going into business with no experience
According to Shelton, the four things lenders look for when you are applying for a loan are your credit rating, collateral, capital and industry experience. Some entrepreneurs make the mistake of overlooking the final factor of professional experience when they apply for a loan.
If you want to start a restaurant, for instance, you need to have some experience working in a restaurant. Cooking at home and dining out don’t count, but working as a waiter does. If you don’t have professional experience to back up your business plan, you risk getting rejected.
After a rejection
You need to be prepared for a rejection of your loan, and you need to be prepared to re-work your business plan, save more money or do whatever else the loan officer suggests to secure a loan. It can be hard not to take a rejection personally, but remember that the lender is not rejecting you or your business idea–they are simply rejecting the opportunity to help you finance your business. You need to rework your business plan and/or secure more capital before you try again.
If you have already been rejected, then now is a good time to seek counseling through your local Small Business Development Center and/or SCORE chapter to find out what you can do to enhance your business plan.
Apply for a larger loan in the future
It’s not uncommon for startups to fund the first year of their business through microloans, personal credit and crowdfunding. But to actually grow, you’re going to need to secure a larger loan.
Shelton advises entrepreneurs to apply for a larger loan once they have the numbers to prove that they are growing: “What you’re hoping to get from these smaller loans is traction,” which you can use to “pitch [your story] as a growth story” when you apply for a larger traditional loan from a bank. Proving that you have experience growing your business from someone else’s money will help you convince the bank that you can do the same with their loan.
Starting a business involves a lot of moving factors, but the most important one is financing. You are going to need to spend some time evaluating your business model and writing your business plan before you can really determine the type of loan you need and the best way to secure that loan. As your business grows, your lending needs will change, so take the time now to understand the differences between lending and investing so you can be ready when your company starts to grow and needs to adjust its financing.
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