So many people have excellent ideas for starting their own business, and you may very well be one of those people. But most of the time, the problem many entrepreneurs run into when trying to start their business is that they just don't have the money.
Getting small business loans is not easy - I am just going to tell you that up front. If you don't have a large amount of funding yourself, a successful track record in the field of your business, good credit, and a top-notch business plan, you are really going to find getting small business loans difficult.
OK - so enough with the bad news! Let's get to the good news of some simple steps you can take to greatly increase your chances of receiving that small business loan.
Create an Amazing Business Plan
Your business plan is the first impression lenders will have of you and your business idea. Your business plan is basically your resume or application for money. The more thoroughly you have thought out your business and explained it in your plan, the better chance you have of receiving the loan you want.
Now we won't go into a lot of detail about what all is needed in a business plan because the subject is too large, but here are some highlights.
1. Executive Summary - this is a high-level overview of your business. The executive summary lets the lender know what your business is and where you plan to take it. Notice the keyword 'plan.' This isn't just where you 'want' to take your business, but where you 'plan' to take your business.
The rest of your business plan is proving that you have a plan, explaining that plan, and convincing the lender your plan will work.
2. Market Analysis - this is where your knowledge and experience in your industry will come in. In this section, you have to describe the industry, its current growth, challenges, and expectations. You have to describe your target market, how you plan to reach that market, and the results of any market tests.
You also need to analyze your competition, their advantages, and how you plan to overcome their advantages. Finally, if there are any regulations, patents, or laws that you have to deal with, those will need to be described in detail.
OK - so as you can see, there is a lot that goes into writing a business plan. What I have mentioned so far is probably around 25% of what is required.
But don't give up just yet. While you are going to have to put a large amount of effort into your business plan, there are ways to speed up the process - you can hire a consultant, you can buy business plan templates, or you can even purchase business plan software to give you a head start.
Get Your Personal Finances In Order
You have heard that it takes money to make money? Well, this is the case with receiving small business loans.
First of all, your finances have to be healthy? Lenders will scour your personal finances to find reasons not to lend money.
Do you have bad credit? That's a problem.
Have you had a recent bankruptcy? Also a problem.
Do you own your house? That is very good!
Do you have liquid savings to invest into the business? Even better!
Your personal credit means a whole lot. Lenders (usually correctly) suppose that if you can't manage your finances well, that you won't be able to manage a business's finances well.
Also, the more collateral you have, the better. Lenders want to know that if you fail, they will get something for their money.
Try Various Lending Options
Don't put all of your eggs in one basket, so to speak. There are several lending options you have based on your needs.
1. Small Business Administration loans (SBA)
Naturally, when most people think of a business loan, they think of going to the bank. Many business loans from the bank are backed by the Small Business Administration (SBA), and the SBA has the final say whether you get lending or not. But once you realize all of the competition you are against for SBA loans, you will understand why you need to have a plan B.
2. Get a line of credit - a line of credit is easier to obtain, but only if you have sufficient collateral to back it up. Generally a line of credit will work if you have assets (i.e. house, rental properly, etc) but can't spend the money because it is not liquid.
3. Venture capitalists - these are the big-time private lenders. They usually won't lend less than $1 million, and they expect you to be able to turn a profit fairly quickly. If you have a great plan, great experience in your industry, and a game-changing idea, a venture capitalist might be the way to go. After all, just about every major company (Google, Microsoft, Wal-mart) received some money from venture capitalists at one time.
4. Angel investors - Angel investors usually lend less than venture capitalists. They certainly want to make a profit, but they also want to help others. For example, perhaps someone gave them a hand at the beginning of their careers that really gave them a head start, and they may want to help the next generation.
5. More private lenders - there are all types of private lenders out there. Some specialize in certain industries, some will lend you money for almost anything but they charge outrageous interest rates, and others are looking to invest in long-term businesses. It will just be a matter of you doing some legwork and finding the dancing partner that you need.
Finally, one more note on lending options for small business loans - you can mix and match lenders. Sometimes you might have to get a little from here and a little from there, but when you put it together, it gives you the money that you need.
So we have talked a great deal about getting small business loans and the steps you have to take. There is intense competition for this money; after all, if you were to lend someone money, you would want to have a pretty good idea you would be getting it back. So jump in there with both feet, start planning, and see if you have what it takes to start your very own business.
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