One of the first things on a new, small business owner's mind is finding enough startup capital to get the business running. Things like office supplies, operating space, permits, miscellaneous office fees, equipment and vehicles are needed just to start making money. If you have no source of capital to start with, and you're not looking to dip into your personal savings or take out a personal loan that can ruin your credit, you might be interested in taking out a business loan. However, here are a few things you should know about before applying for a business loan.
Business Loans For An Established Business
Obtaining a business loan for an existing business is usually a lot easier than obtaining a loan for a business that is being started from scratch. An existing business already has an established customer base, and records that can prove the business is profitable. Established business may also have collateral like equipment or vehicles that can be used as collateral. Typically, an established business can provide the following to obtain a business loan:
- A business plan with future projections
- Existing collateral
- Financial statements
- Balance sheets
- Accounts receivable and payables
Business Loans For Small, Startup Businesses
Unlike an established business, you'll need to prove to the bank or financial institution offering the business loan that you and your business are worth the investment. Make sure you prepare the appropriate documentation, which includes:
- A business plan: this can make or break your business loan approval.
- Personal credit history: important because your business has no operating history.
Also be prepared to answer the following questions:
- How much money do you need to borrow?
- How do you plan to spend the money?
- When can you start repaying the small business loan?
- Are you willing to personally guarantee the small business loan?
A Personal Guarantee On A Small Business Loan
Some banks may ask you to personally guarantee a small business loan. This means that you alone, not your partners or the business itself, will be held accountable if the business cannot repay the loan. That means that your own personal assets may be used as collateral for the small business loan. A personal guarantee allows the lender a means of recovering any losses from a business loan that you cannot repay.
Personal Loans VS Small Business Loans
If you are having trouble obtaining a small business loan, you have the option of pursuing a personal loan. An example of a personal loan would be a home equity loan. Home equity loans are available when your home is valued more than your current mortgage. Another personal loan would be a taking a loan against a retirement account, like your 401k. What this means is you are taking an actual loan from your retirement account that you must pay back, or suffer any penalties of withdrawing from your retirement account too early. The advantages of a personal loan for your new, small business include:
- Personal loans tend to be easier to obtain.
- They require less documentation. For example, you wouldn’t have to provide a business plan.
- There are no collateral requirements (personal guarantee) aside from the asset being used.
- You can typically use the funds from your personal loan however you see fit.
However, there are some disadvantages to a personal loan that should be considered:
- Personal loans can affect your credit score.
- A personal loan may have a higher interest rate and steeper lender fees.
- The amount you have at risk if your small business does not succeed.
It is advisable to seek a business loan from a financial institution you have history with. For example, you can try to obtain a small business loan from the same institution responsible for your mortgage. Demonstrating a firm financial responsibility and healthy financial behavior can help the lender make a decision as to whether or not they are making a sound investment in your small business.