5 Tips when Applying for a Small Business Loan during an Economic Downturn

Applying for a small business loan in a bad economy will require more of an effort on your part. When the economy is slow, lenders are less likely to invest in new ventures. In part, they do not have the cash on hand to do so. Another significant factor is the fear of losing money in the investment. If you can overcome these issues, you have a better chance of getting the loan.

#1 Consider SBA Guarantees

The Small Business Administration is a very misunderstood agency of the government. First, the SBA gives very few direct loans, and those loans are for highly specific business models. In most cases, a small business will qualify only for a guaranty. A guaranty, though, can make you a more attractive borrower to private lenders, because it assures the lenders against loss if your default. Another misconception is the SBA has lower loan standards. You will need to meet high standards for credit and business viability if you plan on using an SBA guaranty.

#2 Look for Added Equity

Your debt to asset ratio will come into play when you seek a new loan. In order to strengthen your position on this matter, consider taking on investors who can provide you with a boost of equity. If you do not provide any collateral to take on an investor, your balance sheets will reflect only the added cash and no added debt.

#3 Prepare a Careful Business Plan

Business loans are not given on credit alone. You will need to show a lender you have a model that has a high promise of future success. It is your future profits that will end up repaying the loan. Showing projections for profits well in excess of the loan payments is key to assuring a lender you will be good for the money. Of course, these projections need to be based on market research and past financial accomplishments in order for a lender to take them seriously.

#4 Secure the Loan

Placing collateral is one way to promise a lender you will not default. It is best to use a business asset as collateral. Using a personal asset will place you in personal financial harm if the business does not repay the loan. When possible, separate yourself financially from the success of your business. You should not have to declare bankruptcy for yourself just because the business is not standing on its own.

#5 Seek Grants and Contracts

Government contracts and grants are given to highly specific businesses. However, you may qualify, and it is worth your while to find out. If you are supplying your local tax base with a significant boost, providing a large number of local jobs, creating a nonprofit organization, or seeking a government contract, you may be eligible for cheaper financing through government direct loans or grants. You may contact your local SBA office for a list of potential grants. If you are working with an SBA qualified lender or a CDC, ask directly about these options.