Understanding Your Business Loan Options

Borrowing, Business Loans & Lines of Credit, Commercial Loan

Lending institutions profit from helping businesses thrive. If you are concerned about your business simply surviving, or if there are indications of fundamental flaws in the business model, there may be too much risk for any outside investor to take on. Before you approach any financial institution for a business loan, there are several key documents you should develop and questions you should be prepared to answer. These must demonstrate who, what, when, where, how and why an institution would be making a sound investment by loaning money to your business. And, in the spectrum that ranges from failure to survival to a thriving business, you should develop these documents in such a way that the focus on thriving is front and center and well-articulated.

  • Who — Create executive profiles that provide detailed biographical information, education, past work history and major accomplishments for each key decision maker in your business. Because banks will be investing in you individually, it is important that your personal credit is in great shape. Consider who would want to invest in your business. If your business serves a small, local geographic area, then a local community bank, as opposed to some global banking behemoth, may have more interest in investing in your venture. In addition, there are lending institutions that specifically focus on minority- and women-owned businesses. Part of your success in getting the funding you need will be identifying what types of institutions will have the most interest in investing in your business.
  • What — Determine the amount you need and define precisely what the loan will be used for, and how your business will become more profitable (thrive) as a result of the loan. Depending on the type of business and what is needed to take it to the next level, consider breaking your requests into several smaller, more manageable amounts. But keep in mind that larger banks tend to provide larger loans that yield bigger returns per deal.
  • When — Outline when the loan would come into play and show that you have prepared well in advance for this anticipated need. Waiting until you are desperate for cash or you are at the brink of bankruptcy is simply not the right time to apply for a loan. Business plans and financial projections are the backbone to any successful business. Just be sure that when you present these documents to lending institutions, omit any proprietary information that might put your business at risk from a competitive standpoint.
  • Where — Assess where you are doing business today and where you want to do business in the future. In an increasingly global economy, understanding any cultural considerations is essential, not only from an operational perspective, but from the standpoint of the individuals representing the lending institutions you will be dealing with. These relationships and the overall loan process will vary greatly by country. Disregarding any cultural values, such as a lengthy “courtship” period prior to getting a loan approved, may disqualify you (or your business may go under if you don’t plan appropriately), regardless of any indicators of success related to your business.
  • How — How will you repay the loan? What collateral do you have if you go belly up? How will you leverage the loan to increase your business’ bottom line? Again, having strong personal and business credit records, combined with your business plan and financials are key here. Additionally, if you have worked with a lending institution for your personal needs and have demonstrated fiscal responsibility, that same institution may be more likely to provide you with a business loan than an institution that has no prior history with you.
  • Why — Why are you approaching a specific institution and why should that institution invest in you? Why should the lending institution pick your business over several others in the same industry and/or geographic area? Aside from the numbers, the answer to this question should reveal your passion for what you do and your determination to do whatever it takes to make your business thrive.

From banks, credit cards and credit unions to Small Business Administration (SBA) loans, investors and alternative lending options available online, there are several loan options available. Business credit cards are a viable solution for newer businesses because you can establish credit history for your business that is separate from you as an individual. And if used responsibly, business credit cards can help open the doors to future lending possibilities. Within this category there are several options that you can choose from, including business debit cards, prepaid business credit cards, unsecured and secured corporate credit cards, and more. While extremely convenient, the interest rates tend to be much higher than traditional bank loans.

The SBA provides a vast array of general business resources, templates and checklists. The independent governmental agency has local offices in several major metropolitan areas throughout the U.S. and four types of lower-interest loans: General Small Business Loans: 7(a); Microloan Program; Real Estate & Equipment Loans: CDC/504; and Disaster Loans. Many businesses that might be unable to access funding through traditional lending institutions may qualify for an SBA loan. The SBA also provides grants. Both loan and grant programs have very specific criteria, so contact your local office and the website for more details.

While SBA loans focus more heavily on credit history, several crowd-funded online financial communities (bringing borrowers together with individual and corporate investors) are cropping up. These focus more on cash flow statements and the interest rates are typically higher than bank loans. So if you find that you cannot access funding through the banks, you may qualify through a source such as On Deck or The Lending Club. There are even opportunities for more creative projects that may not be able to demonstrate traditional business models and business plans, such as Kickstarter.

Once you’ve done some initial research, it may boil down to a numbers game; you may have to apply through many lenders, compare offers and then select the loan with the best interest rate and terms that work best for your situation. By answering the questions above, being vigilant about your credit and preparing some key documents, you can demonstrate to any lender that not only that you know how to effectively market and manage your business, but you also have a solid business model, proven financial history and the right people in the right place to grow your business. And that’s what investors want to see.

If you are interested in a loan, visit our curated list of top lenders.

Photo ©iStockphoto.com/mangostock

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