New business loan new start small business loan for new business

Starting a new business is an exciting venture, but securing the necessary funding can be a significant challenge. While your first instinct might be to approach a traditional bank, they typically prefer to lend to businesses with established operating histories. This article will explore alternative funding sources, strategic approaches, and key considerations to help you find the capital your new business needs to thrive.

Where Should You Start Your Search for Funding?

Before looking externally, consider your personal resources and government programs designed to support new businesses.

Personal Savings as Your Primary Source

Your personal savings should be considered the primary source of funds for starting a business. If you haven't already, begin accumulating cash through personal savings now. Demonstrating your own financial commitment can also be a positive signal to potential lenders.

Small Business Administration (SBA) Loan Programs

Don't overlook the Small Business Administration (SBA) loan guarantee programs available for start-up businesses. These programs don't directly lend money but guarantee a portion of loans made by commercial lenders. With an SBA guarantee, banks are often more willing to consider lending to new businesses.

Build and Maintain a Strong Credit Rating

A good personal credit rating is crucial for securing any type of financing. Most lenders rely on a FICO score, a three-digit number that predicts the likelihood of you repaying your credit as agreed. FICO scores generally range from 300 (poor) to 850 (excellent). This score evaluates your credit payment history, the number of open accounts, overall credit balances, and public records such as judgments and liens. A higher score improves your chances of approval and potentially better loan terms.

How Much Funding Do You Really Need?

Understanding your financial needs is the first step in any funding search. A detailed cash flow control form will help you outline all your sources of income and expenses. Some common expense items for a new business might include:

• Purchasing supplies and inventory while waiting to get paid by customers.
• Covering payroll and rent.
• Acquiring essential equipment and fixtures.
• Investing in technology, such as computers and software.
• The cost of purchasing an existing business, if applicable.

Prioritize areas where your options are limited to paying in cash, and review alternatives where there may be another way. For example, you don't necessarily need to pay cash for a delivery truck when you can rent or lease one. Next, consider what assets might serve as collateral for your loans.

Understanding Secured vs. Unsecured Loans

When seeking a business loan, it's important to understand the difference between secured and unsecured financing.

Unsecured Loans

Few loans are granted on an unsecured basis, meaning there is no collateral pledged for the loan. Examples of unsecured financing include:

• Credit cards.
• Unsecured lines of credit (often offered by banks or financial institutions).
• Loans from friends and relatives.

Secured Loans

Secured loans, on the other hand, require assets to be pledged to guarantee payment in the event you are unable to repay the loan. Examples of secured financing include:

• Equipment leases (e.g., for computers or machinery).
• Home mortgages.
• Car loans or leases.
• Many Small Business Administration (SBA) loans.

What Types of Collateral Do Lenders Look For?

Common types of collateral include equity in your home, accounts receivable, business inventory, and equipment. Lenders evaluate the collateral to determine how much they can lend against it. Key variables that influence the loan terms you can get include:

• Years in business: Your track record is very important. While banks often prefer businesses with three or more years of operation, other lenders may be less stringent.
• Size of your company and the amount required: Financing institutions vary in the types and sizes of loans they offer. For instance, you wouldn't typically get a small personal loan and a large corporate loan from the same department. Research different lenders to find one that specializes in your needs.

Debt vs. Equity: Which is Right for Your Business?

Understanding the difference between debt financing (loans) and equity financing (investment) is crucial for your business's financial structure.

Debt (Loans)

With a traditional loan, or debt financing, the lender receives an interest rate and fees in exchange for the money. You retain full ownership of your business, but you are obligated to repay the loan according to a set schedule.

Equity (Investment)

Equity financing involves raising money by giving investors an ownership interest in your business. This is common in the sale of stock to a limited number of investors or through participation by venture capitalists. The sale of stock is often highly regulated by state and federal agencies, and you will likely need the help of a corporate lawyer. Generally, an initial public offering (IPO) is deferred until a business has established an earnings history.

Sometimes, discussions about equity arise with friends and family who want to be your partner. Consider this carefully, as they will then participate in the increased value of the business and have voting rights. It's important to be cautious and seek advice from your lawyer and accountant for more information on this subject.

How to Approach Lenders for a Business Loan

The art of securing a new business loan begins with understanding what your potential lender wants. The simplest way is to ask them directly, or consult a trusted friend or business advisor, such as your CPA.

What Should Your Loan Application Include?

For a business loan, the most common requirements include:

• Business financial statements.
• Business tax returns.
• A comprehensive business plan with a budget or financial projections.
• Personal financial statements.
• Personal tax returns.

Be prepared to answer detailed questions about your business and highlight your financial performance, both past and projected. You'll make a more impressive case if you have carefully thought out and become familiar with your plan. Don't hesitate to bring your accountant if you need help. Additionally, be prepared to clearly articulate why you need the money. Simply stating, "I just require the money," won't inspire confidence or show that you've thought things through. Provide specific details about how the funds will be used.

Planning Your Loan Repayment

When applying for a loan, it's beneficial to propose a repayment plan. Examples of different structures include:

• A line of credit, payable at your discretion but subject to annual renewal by the bank.
• A term loan, payable monthly over a specified number of years, starting on a particular date.

Many lenders offer some flexibility in repayment terms. Potential lenders appreciate that you are thinking about how you will pay them back, rather than just focusing on getting the money.