How To Get A Startup Loan

What is the best business opportunity for you? For many people, this is the hardest part about starting a business. To come up with an idea that is something you like to do and will make money, to research the market, to write a business plan.... what a lot of work! But now you are done and it should all be easy from here, right?

Not really. Now it is time to make your plan a reality, which is going to take more money than you have. Do you have enough savings to finance your business for the first year? Not many people do. So that means you have to borrow the money...and so you have to visit your banker.

I have seen many entrepreneurs fail at this point because they do not know what the banker needs to see. This includes those business owners that think they know what information the banker needs to see.

Remember that, when all is said and done, the banker is investing in YOU. The banker will put money in your business if he feels that you and your management team can really make the plan a reality. Why? Because if you can do that, you will be able to earn the money needed to repay your business loan, and the banker will only lend to you if he is confident he will get the money back when it is due. Do not plan on getting approved for a loan if you are unable to show the lender how you will be able to repay the loan in a timely manner.

Unfortunately for you, unless you have successfully started and grown a business already (and even if you have), your business will be perceived as a very risky investment simply because it is a start-up business. There is nothing you can do about this; it is the way it is. However, if you acknowledge this fact and make your banker aware that you know you are a high risk investment, you will make a better impression. The quickest way to convince a lender that you are not a good credit risk is to prove that you have no perception of reality.

You know you are a good risk, but how do you persuade the banker to take a chance on you? The most important thing you can do is to have a written business plan. This demonstrates that you have carefully thought through your business and you have a plan for making your idea a reality. Keep in mind that the quality of your business plan is not based on how thick it is, but if it contains certain basic elements: a description of your target market, the current problem that your business will solve, how your product or service will solve the problem, the potential revenue and projected costs, and biographies of the management team (who, of course, should have sufficient--and relative--experience in the market you will serve).

Another thing you can do is to offer collateral to secure your loan. You actually may not have any choice about this, but it is good for you to know ahead of time that this will be required. It is common for the bank to secure, or collateralize, your loan by taking a lien on the asset that you are financing. So if you need money to tide you over until your customers pay you, the bank will have a lien on your accounts receivable. The bank will take a security interest in your inventory if you need to borrow money to buy stock.

If you sell services instead of products, then you will not have hard assets, so the bank will probably have to be satisfied with a personal guaranty, which is always required on loans to small businesses. You can offset the lack of collateral by offering a liquid asset, such as a certificate of deposit, to secure your debt. If you don't have sufficient funds to cash-secure a loan, consider asking a relative or business associate to put up the money on your behalf.

Still another alternative is to have an additional personal guaranty, but from a person or company that is creditworthy.

Keep in mind that the key decision factor is whether or not you will be able to generate sufficient cash flow to pay your expenses, earn a profit, and still have enough cash left over to repay your loan plus accrued interest, on the date the payment is due. It doesn't matter how much collateral you have if you cannot convince the lender that you can do this. And it should make you reconsider if your business idea really is viable.

Above all else, be persistent. Submit your request to multiple lenders. Just because one banker says no, do not assume that all bankers will not have an interest in you.