Getting a Small-business Loan

Photo (CC 2.0) by GotCredit, on Flickr

One of the most common requests I get is to help people access “free money” to help them start their business.

Regretfully, my response is there is little, if any, free money available. Instead business owners need to depend on their own personal funds, family and friends, or good bootstrapping.

At some point though, most small businesses need to access additional funds and that will usually come in the form of a loan.

While the reason for the loan may vary, from needing more raw materials to buying additional equipment to buying inventory to hiring more people to a cash flow issue, the early sources of business financing, bootstrapping or personal savings, just cannot cover the need.

So the next step typically is to get a small-business loan.

People are often concerned about their ability to get a loan. It really is not very different from getting a personal loan. The bank wants to know your credit history, what you have for collateral and your ability to repay the loan.

And when your business is new, the banker will want not only this information about the business but also from you, the owner.

There are several common mistakes small-business owners may make when applying for a loan:

Having an incomplete or inaccurate application
Not providing information in a timely manner
Lack of a clear explanation of how much money they need and how the funds will be used
Withholding personal guarantees (this is especially true for startups and smaller businesses)
Not knowing their personal and business credit rating
Not showing efforts to improve their credit ratings
Not having a solid business plan with reasonable projections

Bankers understand that businesses often operate in cycles, with ups and downs. They also know the difficult in starting a business. So make your projections as accurate as possible and don’t hide any information. What the bankers want is realism and a clear path for building the business.

It is also important that the business owner do his or her homework in finding a bank for your loan. Find a bank and banker who understand small-business finance. Like finding other professionals such as your certified public accountant and attorney, it is important to research the bank you hope to use.

Finally, once you get your loan, stay in regular contact with your banker. He or she can provide reliable guidance and possible solutions to challenges that occur. They don’t like surprises. They are willing to work with you as you need to make adjustments.

Business loans are crucial in your growth. Learn early they work and on, what you hope to be a long-term relationship, with your banker.

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About Glenn Muske

Glenn Muske is an independent expert on rural small business, working as GM Consulting – Your partner in achieving small business success. He provides consulting, and writes articles for county extension agents and newspapers across North Dakota. Previously, he was the Rural and Agribusiness Enterprise Development Specialist at the North Dakota State University Extension Service – Center for Community Vitality.