You have a good idea and a lot of enthusiasm for a new business, but you need money, probably in the form of a business loan. So how do you get a business loan for a startup business? A bank loan for a new business, or to buy an existing business, is the hardest type to get. The bank has no business history to look at to evaluate your ability to repay the loan. It has no personal history about you to determine your ability or willingness to repay. Don't worry: Follow these four steps to improve your chances of being approved for a startup loan.
You must show the bank that you understand the market and industry that you are about to enter. As part of the business plan that you present to the bank, you should include a detailed analysis of the market, the customer base, and the broader industry. Include a statement of how much market share you think your business can capture and how that translates into dollars. Based on similar companies in the industry, develop income, expense, and cash flow projections for the business. This will help convince the bank that your firm will generate the cash flow necessary to repay the business loan.
Many new business owners greatly over-estimate the amount of money they need. When you are developing your business plan, make your estimates as exact as possible and justify how much you need for each purchase. If you apply for a loan and do not justify how you are going to spend the money, you will be rejected. On the other hand, if you account for every penny in your business plan, you are far more likely to have a successful application. You should even prioritize your need for funds. For example, if you are applying for a $50,000 loan and $25,000 is for equipment, show that in your business plan. State the type and purpose of the equipment you are going to buy. Go ahead and account for the remaining $25,000.
If you or any of your management team have experience in the industry, share your experience with the bank in your business plan. The more experience you or other principals have, the better, particularly in the same industry. If you have experience in the industry, the bank will have more confidence that you know what you are getting into and how to handle the financial challenges of the business, including repayment of the loan. If you have a colleague who is going to participate in the business that has experience in the industry, that will be helpful to the bank as well. If you don't have experience in the industry, but you do have management or ownership experience, be sure and include the details in your business plan.
If you are applying for a business loan for a startup business, the only way you will be approved by the bank is if you pledge your personal wealth as collateral. If you are a homeowner, you can use your home as collateral and perhaps take out a home equity loan. You can use other personal assets as collateral as well. Lenders will also expect you to make a financial commitment to the business. They will expect to see you inject cash into your new business. If you show confidence in your new business by investing in it yourself, you will have a better chance of getting approved for a business loan.
There are times when a new business start-up simply cannot get a bank loan. If you find yourself in this predicament, there are other potential sources of business funding, such as grants and investors.