The reading level for this article is All Levels
If you are embarking on a new business venture for your first time, you are going to want to learn about starting a small business loan. Understanding how business financing works is an important part of using the financial institutions to your advantage, and, most importantly, churning a healthy profit.
The first thing you have to understand is how business credit works. Business credit is very similar to personal credit, in that it demonstrates the creditworthiness of a particular entity and is built (at least partially) by the timely repayment of loans. Having assets is useful in securing business loans. Business credit is also largely based on profitability and stability, which must be demonstrated both in your Paydex score, and in the proposal that you have to make when starting a business loan.
What must you demonstrate to your potential lenders? This is a bit more tricky than a personal loan. Business loans require a proposal, which includes a cover letter, a breakdown of the business, a description of the members running it, a market analysis, financial underwriting, and a conclusion. Essentially what you have to do with your proposal is demonstrate the following: that you are a capable business and salesperson (the cover letter), that you have a sound business model and idea, and that the individuals running the operation are qualified for the job, that you have the necessary resources and a well-estimated budget for what you are going to do (underwriting…and this should include extra assets that can secure you in a worst-case scenario), and a market analysis that shows that there is, in fact, a demand for your services and what the competition looks like. You want to cover every principal avenue that would otherwise suggest that you can’t repay the loan.
When starting a business loan, it is also very helpful to know where to go. More often than not, large banks will be less flexible with you than smaller bank branches and credit unions, and will be less likely to listen to your sales pitch if it doesn’t fall in accord with their regulations. Be sure to know the best opportunities for financing and you will be fine!
