Recently an article was written about the 5 steps to a small business loan, but the information provided was outdated and needs to be corrected.
Although many banks and lending institutions are now loosening up their money to lend to small business startups, it does not mean the floodgates are open. This is because banks are still very wary about lending money to start up businesses unless they meet certain requirements.
However, there are a lot of myths associated with getting a business loan from a bank that can sidetrack your efforts. While most of the advice is well meaning, it is also misplaced as well. What follows are some common myths and facts about how to secure a loan for your small business startup.
Fact: Nothing takes the place of a good Business Plan
Your business plan lays out exactly what you need in order to achieve your goals. An effective business plan does three things;
- Organizes you Entire Proposal
- Accounts for all Money needed to successfully start your Business
- Provides information to the Lender about what your Business will achieve
Essentially, no lender will offer you money to start up a company unless you have a good business plan. Your business plan should lay out in simple, but effective terms exactly what is needed to help you get started, the expenses along the way and the expected revenue as well.
One of the biggest mistakes that most people make is not allocating enough money for their loan to cover all expenses until their business revenue really starts to kick in.
Myth: Building a Relationship with the Banker
You have probably read a lot of advice about how building up a relationship with the banker can help secure you a loan. Well, perhaps if you are looking for a home mortgage and you need good quotes, such as relationship can pay dividends.
However, when it comes to starting up your own business, your relationship with the bank will have little, if anything to do with getting a loan. All startup businesses are risks and no matter how friendly you are with the bank, they are only looking for three things;
- Revenue your Business will Generate
- Value of your Idea
If you have a very valuable idea such as starting up the next Google or creating the 3D printer, then you’ll have investors lining up to give you money because they see the value in your idea. This means that you will need to create a strong business plan and have an idea that will attract investors. Otherwise you are looking at a tough, uphill climb to fund your business.
Plus, having multiple parties checking your personal credit may have a negative impact. Use a professional company to ensure that only banks and lenders who may invest with you.
Fact: Show that You Need the Loan
This may seem counter-intuitive at first, but banks have plenty of experience when it comes to what types of businesses will work. Essentially, a bank or lender is looking for a borrower who demonstrates the willingness to succeed.
For example, if you are asking for a $100,000 loan and your net worth is $140,000, the lender understands that you really need this loan and along with your good personal credit are more likely to work hard to pay it off.
However, if you ask for $100,000 and your net worth is $3 million, then you have a lot less to lose. Plus, if you are really worth that much money, why are you taking out a loan in the first place? This is a signal to the bank that you may not be as fully committed to the business as you should be.
Myth: Check your Business Credit
It is understandable that you should have good personal credit before attempting to get a loan, but business credit? Most people don’t have any business credit built up at this point unless they’ve already started up a successful business. And if that is the case, then you don’t need to check it if it’s already good.
If you contact Dun & Broadstreet, you can learn how to build up your business credit, but that will take time. Plus, your time will be better spent working on your own personal credit, creating a strong business plan and having an idea that offers real value for investors. Otherwise, you may very well be wasting your time in trying to create good business credit unless you have a strong background in business that can be used as such.
Fact: Be Open & Upfront
One of the worst mistakes that you can make is trying to hide information from your banker or lender if things start going wrong. During the entire process from the time you fill out the application until the loan is fully paid off, you need to be open and honest with the lender in case anything happens.
This is vitally important because the only thing worse than bad news to a banker is the surprise of hearing the bad news. If you have not received the loan yet and your personal credit has taken a hit, call up the banker and tell them. If you have gotten the loan and the business is starting to head downhill, call up your banker and inform them of the news.
Bankers and lenders understand that bad things can happen and often do. By being upfront, honest and informing your banker as soon as possible, they may be able to help. Quite often, lenders are willing to work with you in order for you to complete the loan. This is especially true if you have not missed a payment yet. You may be surprised just how far a banker will go in order to help you succeed if you inform them early about what is going on.
Getting a loan for your new business takes plenty of effort, but having the right advice can provide you with direction and focus which will help you succeed in getting a loan. By focusing your efforts and ignoring bad advice, you can be one step closer to starting up your own business.