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How to get a small business loan

You’ve conceptualized your great idea, created a unique offering, and are now entering phases of growth you never thought possible when you first launched your business. Maybe you’ve dipped into your savings and need funding to get to the next level. 

It’s a familiar situation for many small businesses. A logical next step, for many small business owners, might be to take out a small business loan. Here’s everything you need to know.

How should you expand your small business? 

There are several ways to attain financing for your small business. You can contact venture capitalists – they’re lenders that specialize in startups that have high growth potential – and pitch your idea. If they like it, they’ll offer funding for a piece of your business. This is great for businesses that are designed to scale. 

Crowdfunding is another avenue small businesses can go through. Crowdfunding allows you to offer your products or services to a number of investors (think hundreds or even thousands) who believe in your business. Platforms such as gofundme and Kickstarter are two popular crowdfunding platforms. If you have a marketable idea that people will want to purchase, this is a great way to drum up some funding – and interest. 

A third, more traditional route, is to go to your local bank for a small business loan. You’ll need a solid business plan to receive a business loan, as banks can sometimes be quite strict with who they lend to. But it might just be the best option to help you expand your business. 

Let’s take a look at what it takes to get a small business loan. 

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What is a small business loan?

Small business loans help grow your business. You can use them to buy equipment, office supplies, onboarding new employees, buying raw materials, or developing or launching new products. 

They aren’t a gift or bursary; you’ll have to pay it back. Lenders are taking risk, so the application process can be tedious. They tend to loan to businesses that can prove they can pay back their loans. After all, banks are in the business of making money, themselves. 

To feel secure, lenders ask applicants a lot of questions — so be prepared. Identify exactly how you’ll use the money. How do you plan on growing your business with the funds loaned by the lender? When do you plan on paying the loan back?

Some companies ask for working capital to meet day-to-day needs. Loans for working capital get repaid during your next full operating cycle — usually after one year. 

Growth capital, meanwhile,helps you expand your business. They’re typically paid back in seven years; but you need to show how your profits will increase. 

How much of a business loan do you actually need?

Take as much as you can get, right? Think again. Remember you’re taking on additional debt – and debt has to be repaid. 

List out exactly what your business needs to take its next step and estimate those costs. In addition to that, calculate your expected revenue. That way you’ll have a sense of how much your profits will cover, so you can apply for a smaller loan. 

Additionally, make note of how, exactly, the loan will help your operations. Are you buying heavy machinery, or adding more inventory? How will you pay for the added costs of property tax, warehouse space, and business insurance?  Be as specific as you can because it helps to clarify how much to ask for and it also shows lenders you know what you’re talking about. 

Can you pay the business loan back?

Make sure you have a clear idea how long it’ll take you to pay the loan back.

You’ll need to offer collateral — something the lender gets if you can’t pay back the loan. This could be some of your inventory, real estate holdings, shares in your business, or work vehicles. Make sure you can prove the value of your collateral as well. Again, be as specific as possible. 

For example: If you’re offering up a work truck as collateral, research the Blue Book value and present comparables to the lender. They’ll appreciate the specificity and know you’re serious about the loan. 

Many lenders also want a personal guarantee – your home, your car, expensive personal instruments. Anything that’s separate from your business, has value, and proves how serious you are. . 

Put together your loan package

A loan package is a set of documents that helps a lender understand why you want a loan. It’s your story that positions you as a reliable and capable entrepreneur who can overcome any challenges. 

Potential lenders use your package to discuss and defend your request with a loan committee. Together, they’ll approve or deny your loan — so make it good. Don’t be afraid to sell yourself and your vision for your business. 

The three things to include in your loan package

Statement of purpose

This is an overview of your loan request. It should explain how the loaned money will help your business in the future. It’s the first thing they’ll read and must explain why they should believe in you. 

Include basic facts; focus on what you’ll need, how you’ll use it, how much time you’ll need to pay it back, how you’ll repay it, and the collateral you’re offering to secure the loan. 

It should also describe your business. Create a narrative about what you do, the products/services you provide, the benefits of the loan to your operations, and why you do what you do. 

Business plan 

This should include a few different sections. Go deeper in describing your business. State your vision for your company and demonstrate you understand where you are now and how it’ll grow. Provide an analysis of economic conditions impacting your business. Include how many clients you have, their buying patterns, your competition, and any regulatory barriers you foresee having to overcome. This section requires a lot of thought and know-how. Look for examples online or ask your network for advice. 

Financial statement

This shows you know how you handle your money. Have a cash-flow statement clarifying what’s coming in and going out each month. Use a current 12-month statement that projects six months into the future. 

Additionally, include a personal financial statement — a balance sheet for your finances not tied to your business. This allows lenders to evaluate how you handle your money. If you have a long-standing business, think of submitting three years’ worth of statements. A new business project including the past 12 months, if possible, should suffice. 

If you plan on applying for a small business loan in the future, keep that in mind when managing your personal finances. Lenders won’t like seeing what they believe is too much personal spending. 

Along with your financials, emphasize how you plan to pay the money back. This will put the lender at ease and prove you know how to handle your money. When projecting income or revenue, make it realistic: add examples, evidence, and case studies.  Lenders like practical visions, not wild fantasies. 

If you get rejected, don’t worry. Ask why so you can improve your package for the next lender. 

The bottom line

There’s a lot of work to do when applying for a small business loan, but the potential benefit for your company makes it worth it. Here’s a quick refresher on the things you need to know before applying: 

  • The reason you’re asking for a small business loan
  • The amount of funding your business needs
  • What you can use as collateral
  • The potential revenue from the loan
  • How long it will take to pay back

Cover all your bases, provide a good case, and you should be in good shape to receive that small business loan.