How to Apply for a Small Business Loan

Before lenders will grant a small business loan, they want to be sure that the loan will be repaid. Every loan is a risk, but banks and brokers want to take as little risk as possible. They look for businesses that show promise, and they award loans to businesses that have solid personal and business backgrounds and are committed to the success of their businesses.

What are the first things the lender will look at? The following are the five basic items that all lenders look at before they will approve your business loan:

1. Credit history One of the primary factors lenders look at is the condition of your personal and business credit. This is generally reflected in your credit score that is obtained from the three credit reporting agencies. Your personal credit score is associated with your Social Security number, but business credit reports are tied to your tax ID number. Before you even start shopping for a loan, request a copy of your credit report from all three major reporting agencies: Equifax, Experian, and TransUnion. Review it carefully and correct any mistakes before you start the application process.

2. Your investment Business loan applicants should have a reasonable amount of their own money invested in their business. Lenders want to know that you will be motivated to work hard to make your business a success. When they see that you have invested a substantial amount of your own money in your venture, they will assume that you will work hard to make it a success. The amount of your required investment may vary, but it should be at least 20% of the amount you need for the business venture.

3. Working capital Working capital consists of your current assets minus your current liabilities. Working capital can also be thought of as cash on hand or what is available to pay current debts and keep your business running. A lack of adequate working capital increases the risk that your business will fail and makes lenders much less likely to approve your loan.

4. Ability to repay Banks want to see two sources of repayment: cash flow from your business and a secondary source which is typically collateral. Lenders will look at your past and projected financial statements. They will want to see your personal financial statements, personal tax returns for the past two-three years, business financial statements for the past three years or for three projected years, and accounts receivables and payable aging. If your business has consistently made a profit or you can reasonably project a profit, you are more likely to get approved. If your business has not been consistently profitable, you can increase your chances of getting a loan by including detailed information of new opportunities, new contracts, or other information showing that your company?s future will be profitable.

Most lenders require collateral to secure the loan. Collateral is required for all SBA loans. Collateral can be business assets and personal assets. If you plan to purchase equipment and other assets with borrowed funds, these assets will be used as collateral for the loan. Lenders will also require you to personally guarantee the loan.

5. Experience and character Lenders will expect you to have experience in the type of business that you plan to run. If you do not have that experience, lenders will expect you to hire people who have experience. Even if you do not have experience in this type of business, you should at least be able to show experience in other businesses and managerial experience.

What documents will lenders require? In order to expedite the process, the following four documents should be available for the lender to review:

1. Business plan A business plan is particularly important for new businesses, as they lack a track record for lenders to review. Your plan should convey all important facts about your business in a concise manner. A professional business plan will be at least 20 pages long, plus financial projections. The business plan will include:

Balance sheets, Profit and loss statements, and Cash flow projections

from the last three years or for three years? projections.

Accounts receivable and payables aging

breaking your receivables and payables into 30, 60, and 90-day categories.

Market data showing demand for your type of business

Research on competitors including their customer base and price points

2. Loan request This can be included with the business plan and should detail the amount of money requested, how the loan funds will be used, the type of loan, the amount of working capital you have, the collateral that will secure the loan, the personal guarantees of the loan, and how the loan will be repaid.

3. Personal financial statements You will need to provide personal financial statements for anyone who owns 20 percent or more of the business. The financial statements must include a complete schedule of assets, debts with balances due, payment schedules, maturity dates, and collateral used to secure other loans.

4. Other documents Lenders may also require articles of incorporation, taxpayer ID number, legal descriptions of real property, leases, equipment inventories with serial numbers, proof of insurance for collateralized items, and letters of intent showing that commercial accounts intend to do business with you.

What is the loan process? Some lenders like to prequalify potential borrowers to determine how much they can afford. This also gives you and your lender an opportunity to see which loan program would be most appropriate for your needs. After the lender gathers basic information and your application is received, a loan officer or processor will review your credit reports, the amount of available collateral, and your income.

The loan officer will determine if any additional documentation is required. If you are purchasing real estate, you may also need to submit preliminary environmental reports, area maps, title reports, property appraisals, and lease summaries. Next, your commercial loan package is submitted to the decision makers -- either a loan committee or underwriter. During the underwriting process, you may need to furnish additional documentation.

After the underwriting process, you will receive a letter of intent or term sheet. A letter of intent or term sheet is a formal document intended to put all parties (the lender and your company) on the same page. The letter of intent will include the names of all parties, amount of financing, type of collateral, and other key terms. After all underwriting conditions are satisfied, the final loan package is resubmitted to the loan committee for final approval.

At this point, the lender will issue a final full loan commitment. If your loan is approved, you will receive closing documents and they may be handled by a title company. The title company will record deeds and mortgages, order title insurance, coordinate the exchange of funds, and arrange for you to sign the loan documents. At the closing, the lender funds the loan with a cashier?s check, draft, or electronic wire transfer.

Five Things You Need To Remember Before Starting a Small Business

Everyone knows someone who has decided to go into small business but did you know that 70% of all small businesses fail within the first 12 months of operation. In some countries that failure rate is as high as 85 to 90%. Small Business is one of the toughest industries you can ever decide to take on and most people who go into small business go into it for the wrong reason.

I have started 4 small businesses over the last 10 years and every single one of them has been started from scratch and survived into a thriving business. Just recently I have decided to sell one of the businesses off cause it had done what I expected it to do which is the first issue you need to think about.

Issue 1. Have a Clear Understanding of What You Want To Achieve In Your Business

The majority of people, who actually go into business, go into it for the wrong reasons. Even I have been guilty of that. So what is this wrong reason, most people start a small business because they believe they can do a better job then their current boss. Maybe this is true, maybe it is not but what most people really want is better working conditions and better pay. No one can blame you for wanting that. If that is all you want, then I strongly suggest you stay away from small business.

One of the key issues you must remember before evening thinking about starting a small business is this. Do you know what your business will look like? If you were walking down the street, how would you want to be found? What impression do you want to give to your clients? What clearly do you what to achieve in this business?

The second clear understanding you must have of your business is, when will you know when it is finished? When you have built what you want to achieve and more importantly, how will you get out?

See most people when they go into business have no exit strategy and that is one of the worst things you can do. Before you ever start a business, the first thing you must work out is how you are going to get out of the business.

Two years ago, I started a small car cleaning business. My wife and I both started it because she wanted to see if she could build a business. Our exit strategy was to sell the business once it was done. How we would sell it was something we were not sure of?

See we could have taken a number of approaches to this. Our exit strategy could have been to franchise the business, sell it to a single owner or to float it on the stock market. We chose that we only wanted to sell it to another owner, but we still built the business in such a way that there was still plenty of growth and opportunity in the business for the new owner, but we had removed the risk for them on how to run the business by clearly documenting everything they needed to do to run that business.

Before ever starting a business, always think about how you will exit the business, when you have achieved your objective for that business. If you do not have an exit strategy in mind, then you will never get out of the business.

Issue 2. Keep a Strict Schedule

Small business is consuming. Unlike in large corporations where you can hire many people to do a range of tasks, small business requires the small business owner to do many of the tasks themselves. Some of the tasks include doing your books, lodging trademarks, doing the ordering etc. Often when you start in small business, you can not afford to hire people to do these tasks.

What I have personally found is that if you do not keep a tight schedule and document your meetings and tasks you have to do then it will not take very long before you will be swamped by all the things you have to do in the business every day. It is this phenomenon that often leads small business owners to quit and fail in the first twelve months. Let me tell you this, the warning signs that this is starting is when you say to your wife on a Saturday or Sunday afternoon that you are going down to the office to catch up on paperwork for a few hours. Once you get into this habit, you will never stop doing it and the business will consume you really quickly.

I strongly recommend all small business owners keep a diary. My preference is to use Microsoft Outlook, simply because it includes a calendar and you can make sure that each day you schedule your work plus your appointments to make sure you do not forget anything. If you do this, then you will find over time you can get through this plus you will learn how long it should take to do the various jobs that make up your business and whether it is worthwhile in getting someone to actually do those tasks for you.

Issue 3. Build Your Own Mastermind Group

I read a book a little while ago called Think and Grow Rich and is written by a gentleman called Napoleon Hill and he talks about the thirteen secrets to success and obscene wealth. One of the things that I learned both from this book and being a small business owner was that I needed a Mastermind Group.

The Mastermind Group is simply a group of professionals who can help me achieve my objectives for my business. Literally anyone can be part of your mastermind group and some of those would be people like a lawyer, an accountant and other people like your peers who can help you in building your business but it may also include people who are not in business as well to help you keep that balance. The Mastermind Group are really those people you turn to for advice and direction. You do not necessarily have to take their advice but a good mastermind group will allow you run through scenarios on what is happening and the potential outcomes.

Issue 4. Have one night when you do something on your own for you!

One of the big issues that I have had over the last ten years is that I have not been doing every single week is something on my own but I say that I am in the process of changing that. Often when you start in business, with the excitement of building your own business you get so consumed that you forget about a life outside of your business and your business becomes your life.

This is really not a good thing nor is it healthy. Even multi-billionaires do things for themselves outside of business. Look do not get me wrong, business is fantastic and fun and can be both enjoyable and a nightmare however there are other things out there outside of business.

When you start a small business, do not neglect your sports, do not neglect doing something social, if you do, in the long run you will find that you business suffers. Plus, in small business it is very easy to become bitter and twisted but by maintaining those none business activities it will help you to balance your life.

Issue 5. Don't neglect Your Partner or your Family

I would love to see the divorce statistics for small business owner?s because I am quite sure that the divorce rate in small business would have to be about 70 or 80%. The majority of married couples (and I am talking about 90% of the small business people I Know) that I know who have gone into small business in their 30?s have actually been divorced within 18 months of them starting the business.

Look there are lots of reasons why this happens, but in a lot of the cases, the partner who has gone into business neglects their family and money gets tight. In the partners case it is not their fault it is simply because the person gets consumed into the business and they forget they have a life outside of the business.

If you have a family, make sure that you do at least one activity a week as a family. Whether it is having a family night at home such as a video night or games night, or even just going to the park to play once a week, make sure that you do it. PLUS, you must ensure that at least one night a week must be for just you and your partner. If you do not do that your marriage or relationship will suffer.

One thing I share with all the people who come through our training business is that if you want to go into business that is cool but you must be prepared to accept two things ?

1. You must be prepared to start from scratch if your business does not work that is you must be prepared to start with just the shirt on your back.

2. You must have 100% support of your partner and family

If you cannot accept these two things, then do not go into business because too many people who I see that start on this journey fail and end up miserable and have such a downward spiral which leads them to doing something silly, like take up drinking, drugs or try to commit suicide. Remember, 70% of all small businesses fail within the first 12 months. If you were a betting man would you back something that only had a 30% chance of winning, not likely, yet people still go into small business.

The bottom line is this, small business can be the most awesome ride of your life, but it can be also the most difficult and when you choose to go into small business, take your time and plan what you want to achieve. Remember the old saying if your Fail to Plan, you Plan to Fail.