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The Basics of Small Business Loans
April 24, 2008
Small business loans are fairly common. Owning a business can be one of the most rewarding experiences of your life, but also one of the most stressful—especially if you don’t get the startup capital you need to succeed. Typically, you can turn to a bank for recourse and take out a small business loan, but how do you get the bank to accept your proposition?
Small business loans are fairly common. Owning a business can be one of the most rewarding experiences of your life, but also one of the most stressful—especially if you don’t get the startup capital you need to succeed. Typically, you can turn to a bank for recourse and take out a small business loan, but how do you get the bank to accept your proposition?
The Basics of Small Business Loans
Small business loans are fairly common. Owning a business can be one of the most rewarding experiences of your life, but also one of the most stressful—especially if you don’t get the startup capital you need to succeed. Typically, you can turn to a bank for recourse and take out a small business loan, but how do you get the bank to accept your proposition?
First, know exactly where to go. Banks are a good catch-all for the typical business startup, but if your business is sufficiently small enough and you have a supportive network of family and friends, you might try getting resources from them first. A mid-sized business can sometimes be funded by institutional lenders such as credit unions or savings and loans establishments. The U.S. Small Business Administration (SBA) also offers support to startup companies, as do several state and local governments. While you may have to combine money from these sources with small business loans, they can go a long way toward reducing the amount of debt you place yourself and your young business in.
Second, know how much money you need. A responsible business owner is also a responsible accountant, so be sure that you are not asking for too little money…or, on the other hand, too much. Some small business owners overestimate their startup capital. You may have to start two or three times before your business finally succeeds. Plan wisely and thoroughly, because with the risk of failure so high, you don’t want a high-interest small business loan hanging over your head, ruining any future business ventures.
No matter which route you choose, cover your backside with plenty of paperwork. The bank will undoubtedly have you sign a promissory note stating the details of their loan, and if you take money from friends or relatives you should draft an amateur version of this note yourself in order to make a show of good faith. That way, you won’t be stuck relying on Aunt Bertha’s fading memory. Also, be clear about the IRS standards and usury laws for your state. Knowledge is power—banks shouldn’t charge you more than 10% interest per annum, but small business loans with extremely low rates can be just as bad. Be aware of what you’re getting yourself into and don’t be afraid to ask questions if necessary.
Last, make sure that you get straight to the nuts and bolts of your business by laying out a thorough business plan. If you want a bank to respect your business idea, you’ll have to show them every detail of it. This means knowing exactly how much money you need and listing what every single dollar will be used for. You should also lay out a timeline for when the small business loans will be repaid and how—this is a good place to talk practically about how your company will make a profit. Finally, have other options and be confident in yourself. If a bank turns you down, ask them specifically why and learn from it so that you can come back stronger than ever next time.
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