Obtaining a loan for an existing business can sometimes be very difficult. It is even more difficult for a new startup company. It is, however, usually possible to do so if the owner or prospective owner is willing to follow some basic steps.
The prospective borrower should realize that small business loans are considered high risk for a bank. Lending institutions, therefore, almost always require the pledging of personal property by the owner as collateral.
The first step to obtaining a loan is the creation of a loan proposal which consists principally of a business plan. The loan proposal must be a selling document with its main purpose to give the prospective lender confidence that the business is or will become financially successful. To be successful a business must be profitable, have positive cash flow, provide an adequate return on investment, show a strong balance sheet, and perhaps most importantly have longevity and value beyond the present owner.
The loan proposal should first state how much money is being sought and how it will use the funds. If equipment is to be purchased, specific quotes from the manufacturer or supplier of the equipment should be included. Enough working capital should be requested to ensure that the business will have enough cash to operate successfully. It is important to show how the loan will be repaid so a cash flow projection for at least the next three years must be included. Of particular interest to the lender is the balance sheet which must show all the assets of a business balanced against its liabilities and owner’s equity. Most lending institutions want to see an owner’s equity of at least 20 to 30 percent.
A description of the owner’s background experience in the field, the owner’s personal financial statement, and copies of personal tax returns for at least the last three years should be included.
All of the above should be neatly packaged and presented to the lending establishment. Business loans, when granted, are normally for no longer than five years and interest rates are usually higher than loans for non-business purposes such as the purchase of a new car or truck.
