Small businesses are the backbone of the economy and drive the country forward with innovation, ingenuity, and jobs for skilled workers. Once you have decided you want to throw your hat into the ring, you are probably going to have to seek out funding to move forward. All businesses need money to seed the growth and get the business to a point of profitability.
A great idea is a start, but a lot of financial institutions want to see your idea in action, which means you will need a proof of concept before you will get the funds to scale the business. In other words, you have to prove your idea is going to make money one day. Here are some great tips on how to get a loan and start your dream business.
Develop A Plan
Every good idea needs a plan that carries it from the incubation stages to full blown business. This plan will entail what you intend to do with loan funds, how you will scale the business, and a rough idea how profitable the it will be. Most banks, credit unions, or venture capital firms will require this upfront. Do the research on your field to make sure you're in line with other businesses and their projections.
Make sure you have a healthy understanding of the field you are going into and any costs associated with it. Your business plan does not have to include every little detail, but you should feel comfortable being judged by this plan. Lenders are looking for a safe place to earn back the funds they loan out.
Proof of Concept
Some business ideas require quite a bit more than a plan. These ideas require proof that the business can differentiate itself from competition. These businesses are usually in competitive fields or your business plan may involve an invention of your own making. In these cases, the lender might need to see your idea in action to make a determination.
The more competitive the field, the more proof of concept you will need. Lenders may want to see your business up and running, ask you to show profitability, and then loan you funds to scale that operation. No matter how you look at it, you have to be sure you sell your idea and make a solid case for those funds.
Will They Lend to You?
The best idea in the world will not take you anywhere if you don't have the credit score to acquire a loan. Most small businesses are sole proprietorships, which means the financial health of the company is based on your financial health. Your credit score will determine if you qualify for a business loan.
If your business is already up and running, usually 3 years or more, you may be able to qualify for a loan based on the success of the business. There are other ways to make the business the prime credit factor, like LLC or corporate structures, but many new businesses do not go that route. You could also consider a small business credit card to help build credit.
Protect your credit score throughout the startup process by making sure all of your bills for the business are paid on time. Any blemishes to this credit report could lead to an inability to get more funds funneled into your dream project.
How Much Money Do You Need?
Part of your business plan is understanding how much money you will need to fund your business. This amount is wholly upon you to figure out what the funds will be used for and to determine how much you'll need without having to ask for another loan. That's what makes this part difficult for a startup.
You will need to crunch the numbers and make a determination based on your best guesstimates on what will happen to your business over the next few years. You need to make sure you can pay the loan back in full and on time, but also that you don't run out of funds early.The road to profitability needs to be clear from the outset.
Present Your Case
Once you make an appointment to meet with a lender, you will have all of your documentation, business plan, and a presentation of sorts. This meeting is where you can lay out your ideas and have them judged for their viability as a new business. If your business is already running, bring tax returns and any bookkeeping that you feel would enhance your case.
Whether you are a salesperson or not, this is the moment where you are expected to sell. Your business plan was your key to getting you to this point, but now you must make your business plan sing. Show them you are ready to make your company the best in your field.
- Seek out mentorships from other business owners. Their experience will make your journey easier.
- The Small Business Administration (SBA) is the government's way of helping you succeed. Find out what they can do to help you start your company.
- Seek out a lender that fits with your sensibilities. Banks can be tough, while a credit union may be willing to help. Shop your plan around a bit.
- Your friends and family make for great sounding boards for ideas, just do not take their word for it. They might be a little biased towards seeing you succeed.
- Don't give up hope if the first lender turns you down. Revise, improve, and then try again with a different lender if necessary.