Get a Small Business Loan in 5 Steps

A small business loan can be used either to start a new venture or expand on an existing one. Your credit score and financial history will come into consideration when you are seeking a small business loan, but not as much as with a personal loan. It is more common for the factors relating to the potential success of your business to be a large factor. Creating a solid business plan to show your concrete plans to put the loan to work, and ultimately repay it, is the key to securing financing.

Step 1:  Prepare a Business Plan

Your business plan covers the factors in your success. These factors include the experience of your directors, the relationships you have formed, your market advantage, and why there is a need for your business. Simply having an idea is not good enough to secure a small business loan. You need to prove there is a profit to be made with your idea through adequate research. In the case of a business expansion loan, you will need to show your profit will easily increase with the addition of new products or services.

Step 2:  Determine the Amount Needed

The next step in your business plan is to determine the funding needed to generate success. This includes equipment, employees' salaries, insurance costs, office rental and other start up necessities. Some businesses will have relatively low initial overhead, such as Internet companies or home businesses. Other new ventures will require large amounts of equipment, such as manufacturing plants or mines. For a new venture, include only the cost to initially get the company on its feet and running for approximately one year. If you are profitable, you may ultimately seek a business expansion loan.

Step 3:  Determine the Timeframe for Repayment

Your business plan should have at least a 1 year projection. Smaller projections in between will solidify your market research. Remember: very few new ventures are profitable immediately. It takes years to establish a successful business, and acknowledging this fact can show your business understanding to lenders. Be realistic with your projections.

Step 4:  Submit an Application

Your loan application should include your business plan, financial statements from key officers, character references and other relevant information. If you are able to post a collateral to achieve a secured small business loan, you will find lower interest rates. Examples of collateral include real estate, automobiles or other hard assets. Any income you are already receiving or additional income outside of the immediate function of your business should be disclosed. Funding you have received from investors can also show credibility.

Step 5:  Negotiate the Terms

You will not get to choose your interest rate. However, by playing with the length of your loan, the monthly payments and the collateral you post, you can adjust the rate a lender is willing to offer. New ventures may opt for adjustable rates that are low in the beginning to give the business time to grow. When you are negotiating, though, think in the long term. You are building an asset. Start slow and consider what will give your business the highest chance of success five to ten years down the line.