Wondering what it takes to get a loan for your small business?
Here are answers to frequently asked questions
We know: How to Get a Small Business Loan
Is there a difference between getting a consumer loan and a small business loan?
Entrepreneurs may not realize that applying for commercial credit is a more customized process than obtaining consumer credit, and requires a great deal of preparation by the business applicant.
What kinds of loans are available?
Here are some of the commercial credit options:
- Short-term loans are one of the most common types of business loans and are usually for less than one year. They can provide interim working capital for a business temporarily in need of cash, and are typically repaid in a lump sum when inventory or accounts receivable are converted into cash.
- Intermediate-term loans are often used for a business start-up, the purchase of new equipment, expansion, or an increase in working capital. The maturity dates range from one to three years.
- Long-term loans generally are made for major capital improvements, acquiring fixed assets, or business start-ups. The term of the loan runs for periods of three to five years and is usually based in part on the life of the asset financed. Repayment is usually made in monthly or quarterly installments.
- A line of credit offers you the ability to borrow money repeatedly, up to your credit limit, without having to reapply. A line of credit is particularly important to businesses that experience seasonal fluctuations. The lender generally will perform a review once a year, at which time the borrower is asked to provide updated financial statements.
What should I know about applying for a small business loan?
These loans call for more documentation than you might initially expect. Among the best assets you can bring to the lender is a well thought-out and documented business proposal.
Tell me more about what I should specifically prepare.
You should prepare...
- A business description that tells the nature of the business, describes the product and its market, identifies its customers and competition.
- A personal profile that outlines the background and experience of each of the principals in a resume.
- A proposal that states the type of loan requested and its purpose.
- A business plan that outlines your corporate strategy for the next three to five years; it will aid you and the lender in determining whether the business will generate the cash flow needed to repay the loan.
- A repayment plan that tells how you propose to repay the loan or outlines a repayment schedule. The lender will be expecting you to repay the borrowed funds from the profits produced by the business. As a contingency, you might need to develop a plan on how you would repay the loan if the profits alone turned out to be inadequate.
- Supporting documentation will include copies of pertinent papers that support the information contained in your loan proposal-for example, a lease, certificate of incorporation, partnership agreement, letters of reference, contracts, invoices or vendor quotes.
- List of collateral that you will use to secure the payment of the loan. Collateral can include business and personal assets such as inventory, equipment, and accounts receivable or real estate, stocks, bonds, and automobiles.
- Financial statements, both personal and for the business. The business financial statement should be provided for the last three to five years of operation including a year-to-date interim report. The personal financial statement should list your assets and your liabilities.
- Personal guarantees of the owners or other principals usually are required, even from an established business.