The inception of a new small business is often exhilarating. While conducting market research and building a business plan, the moment you realize that your idea could work can be intoxicating. However, the lurking obstacle of securing money to get your company off the ground could threaten to bring the whole project skidding to a halt. Most new businesses shouldn’t expect to turn a profit anywhere from 6 months to several years. Knowing that there is loan money available and how to obtain it could mean the difference between success and failure.
Different Types of Loans
Once you have decided how much financing you need from GBTI Bank, you should consider the most appropriate methods for securing it. There are a variety of business loans, each targeting a specific need and carrying the terms best suited for the type. A few examples are:
- Term Loans – These loans are typically for funding growth and large, one-time purchases. A set dollar amount is lent and repaid in monthly installments. They generally define as short- (6-24 months) or long-term (3+ years). The interest rates can be fixed or variable, and securing the loan with collateral will usually earn lower rates.
- Equipment Loans – When you need to purchase expensive equipment (generally $5,000 and higher), specialized loans are available with a down payment to the bank and the actual equipment serving as collateral. The monthly payments are usually set amounts and the interest could be either fixed or variable.
- Accounts Receivable Financing – This is when a percentage of your outstanding invoice total is issued to you upfront before the customer sends payment. This financing usually carries a variable interest rate and the borrowed amount to which this rate applies decreases as your receivables are collected.
- Business Line of Credit – This is the commercial version of a home equity loan where you can borrow openly up to a set limit, and interest isn’t charged until the money is drawn. These loans typically need to be renewed at the end of each year, and it needs to be repaid in full if it is not.
Before a bank lends your company money, they need to do a risk assessment to determine your ability and willingness to repay what you borrowed. To prepare for this, begin by checking your business’s and personal credit reports. Spend time reviewing these and address the issues that can affect your overall score. Filing disputes against inaccuracies, paying down credit cards and making payments on time could all have a positive effect on your rating, which in turn can help you secure more money with better terms.
Assess your collateral, which are assets considered by the bank to balance the risk of lending money. Business collateral is things like office buildings, warehouses, inventory, equipment and accounts receivable (total cash owed by customers). If you are in the beginning stages of your first business, the bank may want personal securities like your home, car or savings. The amount of collateral you provide will influence the loan terms offered, in most cases. Keep in mind that if you default on your business loan, the bank will seize these assets and sell them to pay down the debt.
If you have already been in business and are now seeking additional monetary assistance from your bank, your current financial statements could have a significant impact on the availability and terms of a new loan. In a nutshell, your current financial standing can help prove to the lender that you have a history of profitability and running your company responsibly. Banks generally request your financial statement to be audited by a certified public accountant (CPA), although this is not always required. Be familiar with the specific details – the bank will likely ask you to explain and provide additional information.
Documentation to Provide
After you complete the initial loan application, you may be asked to provide documentation such as:
- Formal business plan
- Financial statements
- Tax returns
- Bank statements
- Names of executive officers with background details
- Proof of business liability insurance
- Balance sheets
Take the time to gather all of the information and documents needed; make sure they are organized and that the details are thorough and accurate. This presentation might be perceived by the bank to be a model of how your business is conducted and can help you to appear professional and competent. If you’re having trouble completing or understanding the nature of the documents your business needs, it might be necessary to consult a professional. Business lawyers and accountants can help you prepare your paperwork correctly to assist in the loan application procedure and possibly prevent future issues arising from incomplete or incorrect filings.
The standards set for granting loans to small business owners can be high in some cases; however, with the proper education and due diligence, you can be better prepared for the process.