For an
entrepreneur, raising capital for a new business can be as easy as picking
up the telephone and calling a wealthy relative for money or as tedious as applying
for federal and state grants. While each option certainly has its pros and cons,
the entrepreneur should conduct a fair amount of research to make sure that the
selected choice(s) is/are appropriate for his/her unique situation.
Small business bank loans
Some people may choose to obtain commercial bank loans to fund their small businesses.
While this may seem like a good idea to
raise the needed capital, one must not rely
solely on a bank loan to cover all expenses for a startup since most startups require
additional amounts of money to sustain. The borrower should also keep in mind that
a monthly payment schedule and maintenance fees are required almost immediately.
Guidelines may differ from bank to bank; however, there are certain standards that
all banks abide by when approving an applicant for a small business loan.
1. Referrals
Entrepreneurs will often select a financial institution they normally do business
with or have had some business tie with in the past. It is always a good idea for
a new business owner to select a bank which they have already had an existing relationship
with. If none exists, then local businesses, attorneys, and accountants are other
good resources for a lender referral. If these contacts have had strong business
relationships with the lenders, then the entrepreneur will have a better chance
of obtaining the needed funding.
If for any reason the entrepreneur has doubt that a bank will respond favorably
on his/her behalf, then they should
request funding from other banks where they may have a better standing.
2. Credit history
Oneâs credit history is extremely significant for small business loan approval.
Financial institutions often rely on an applicantâs solid credit rating as the basis
for the acceptance of a small business bank loan. If an entrepreneur has stellar
credit and a great business history with a bank, then his/her chances of
receiving funding can be strong. However, a poor credit rating will damage
the chance for funding. Before approaching a lender, the
entrepreneur must first
repair their credit history and then proceed with the application process in order
to be considered for a bank loan.
3. Business plan
Another important piece of the criteria for
entrepreneur to successfully obtain
small business loans from their banks is to present their business plan to the prospective
lending officials. The business plan has to be documented on paper since it is ineffective
and not enough to remember every aspect of a plan through recall. By organizing
and documenting oneâs business
ideas, company objectives, and financial forecasts for easy accessibility,
the entrepreneur will show their prospective lenders they are serious about obtaining
a loan and have properly planned their new venture accordingly. Presenting a well-detailed
business plan can certainly increase oneâs chances of raising capital through a
bank loan.
4. Prospective customers
In addition to credit history, referrals, and the presentation of a business plan,
the new business owner should also provide the lending officials with prospective
customers who are willing to purchase their products and services. By having gathered
a considerable amount of consumers, the
entrepreneur will show the bankâs lending
officials that the business has the chance to succeed and that they will be able
to pay back all owed loan debt.
5. Backup plan
Entrepreneurs will often be rejected multiple times for bank loans before one financial
lender may approve them. While the concept of rejection can be extremely difficult
to bear, new business owners should be persistent in their
funding quest. They should ask lending officials the key components behind
the loan denial, learn from those results, and mend any issues before approaching
the next lender. In addition, they should implement an alternative plan to raise
the needed capital if they are not able to obtain a commercial bank loan. Lenders
may ask the applicant their alternative strategy, and rather than show discouragement,
the entrepreneur should exude confidence in their business ideas and in their goal
to obtain funding.
Conclusion
Obtaining a bank loan for startup capital is a great way of running a
new business
through a reputable company. If an entrepreneur is serious about their
business ideas and utilizing ways to market those ideas, then it would be
very beneficial to get funding
from a local bank. While certain restrictions may apply, most business owners who
qualify will have the advantage of utilizing those funds immediately for their new
business endeavor. One downside of commercial bank loans is the fact that a solid
credit history is required for consideration. In addition, high monthly payments
with interest and maintenance fees may be costly, especially for a young company
that has not yet established a solid track record of financial success.