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Put Money into Your Project: Getting a Small Business Loan Manage Your…
Put Money into Your Project: Getting a Small Business Loan
Manage Your Business More Efficiently
We’ll Answer
What is a small business loan?
How can I prepare to get a small business loan?
What documents do I need to apply for a loan?
Picture Pearl, who owns a jewelry store called – you guessed it – Pearl’s Pearls. Business has been good, and she’s thinking about opening a second location.
Picture Pearl, who owns a jewelry store called – you guessed it – Pearl’s Pearls. Business has been good, and she’s thinking about opening a second location.
Pearl has saved up some money and created a strong business plan. Still, she knows that she’ll need more money to open her new spot.
Pearl doesn’t have a very strong social network or flashy marketing materials. She’s also not trying to create a business with millions of customers right now. She just wants to open another store. So what’s the best way for her to get funding?
Let’s find out
If you have access to a qualified lender – like a bank – and know you can make regular payments, a small business loan can be a great way to get funding.
These loans are designed to help you grow your business. You can use the money for things like buying equipment and office supplies, paying employees, or purchasing the raw materials you need.
A small business loan isn’t a gift, though. You’ll have to pay back whoever’s lending you the money. And since your lender is taking a risk on your ability to make payments, they tend to take the application process very, very seriously.
To feel more secure with the risk that comes with a loan, lenders tend to ask applicants lots of questions. So it’s important to prepare your answers thoroughly.
Identify exactly how you’ll use the money. Some companies ask for “working capital” to meet day-to-day needs. Loans for working capital generally get repaid during your next full operating cycle, which is usually 1 year.
You can also use a loan for “growth capital,” which can help you expand your business. You might get more time to pay these loans back (usually 7 years or less), but you need to show how the money will help you increase profits.
Once you can answer how you plan to use the money, you need to be able to tell lenders how much money you actually need. It might be tempting to think of taking as much as the bank will give, but this can lead to needless debt.
Instead, list out exactly what your business needs along with estimated costs. You’ll want to calculate how much revenue you can take in, too. That way, you’ll know if your profits will cover some of the costs, allowing you to ask for a smaller loan.
When writing down your company’s needs, think through exactly how they will help your operations. Not only will this help you clarify how much money to ask for, it will also help show potential lenders that you understand your business.
It’s great to be able to explain why you need a loan. But you also need to be able to respond to a lender’s biggest question: Can you pay the loan back?
Have a clear idea of how long it will take for you to repay the loan you get, as well as how many years this loan will help your business. For example, if you’re using the money for machinery, know how long the hardware tends to last.
You also need to offer collateral: something the lender gets if you can’t pay them back. It might be some of your products, corporate stock, or a company van. Be sure you can prove the value of your collateral to help the lender feel secure.
In addition to collateral from your business, many lenders require a personal guarantee. This is a form of collateral that is separate from your business like your home, your car, or your rare baseball card collection.
Confident that you can respond to a lender’s questions? Then it’s time to put the answers together in a “loan package.”
A loan package is a set of documents intended to help a lender understand exactly why you’re asking for a loan. It’s like a story that positions you as the reliable hero who can overcome business challenges (if you get a bag of gold).
Potential lenders use your package to discuss and defend your request with a loan committee: managers at a lending institution who review your application and give you a thumbs up or down. So it needs to really work for you.
Your statement of purpose is critical to your loan package. It’s generally the first thing lenders see and tells them why they should believe in your business.
You’ll need to include some basic facts related to the loan you’re asking for. Focus on how much money you need, how you’ll use it, how much time you need to pay it back, how you’ll repay it, and the collateral you’re offering to secure the loan.
More than just a list of facts, though, your statement of purpose should describe your business. Try creating a narrative about what your company does, the products or services you provide, and the loan’s potential benefit to your operations.
You should also use 1 or 2 paragraphs to discuss how much money you and your fellow business owners have invested. This shows the lender you’re as committed to the project as you’re asking them to be.
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Some people write out a statement of purpose like it’s a letter to a specific lender. Others label it as an “executive summary” and just attach it to their business plan.
Either way, it needs to be well-written and informative.
While a narrative about why you need a loan is important, it’s also important to support your request with a business plan.
Your business plan needs a few different sections. Start by briefly describing your business and stating your vision for the company. Show your lender that you firmly understand where your business is now and how it can grow.
Next, provide an analysis of the economic conditions affecting your business. Mention how many potential customers you have and their buying patterns, your competition, and any barriers or regulations your business might face.
This market analysis is also a chance to explain your products or services. Expand on the info you provided in the statement of purpose and help your lenders understand how much revenue your business can bring in.
Lastly, provide a brief overview of your company. Write out your employees’ roles and highlight the management team’s best qualities. Remember: You’re trying to sell your lender on your business’ ability to work well and repay a loan.
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Developing a plan requires a lot of thought and know-how. If you’ve never made a business plan before, look for examples online or ask your professional network for help.
The package’s final section is a financial statement. This group of documents helps lenders see how you handle money before they decide to give you any funds.
Have a cash flow statement that clarifies the money coming into and out of your business every month. This tells lenders how much cash you usually have on hand. Use a current 12-month statement that projects 6 months into the future.
You’ll also need an income statement. More than just measuring your cash flow, this is a record of your revenue, expenses, profits, and losses over a specific time period. Lenders use it to understand your business’ overall finances.
Lenders will want to see a balance sheet for your company, too. This pits your assets (things like money in your account or equipment you own) against your liabilities (money you owe other people) to show your business’ net worth.
Rounding out your financial statement is a personal financial statement. This is basically a balance sheet for finances that aren’t tied to your business. Lenders use it to evaluate how you handle money and the value of your personal guarantee.
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Putting a financial statement together can be different for companies that have been in business for a while versus new companies. Long-standing businesses should include documents dating back 3 years, while new businesses should project for 12 months out from the day they open.
Even if you know what a loan package requires, creating one isn’t an exact science. But there are some things you can do to ensure you’ve taken your best shot.