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Before You Apply for a Business Loan

Preparation will speed the process and improve your odds of approval

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A bank or government agency (such as the U.S. Small Business Administration) are two common sources of funding for your startup venture. If you go that route, here’s a checklist of the things you’ll need to do and think about to prepare for the application process.

Develop a Business Plan and Financial Statements

The lender is going to want to make sure you have a credible business proposal, and that you understand the products you’re offering and the market in which you’re operating. A typical business plan includes an executive summary, a clear description of what the business intends to do, forecasts of revenue and expenses, an analysis of the market and the competition, and strategies for growth and possible exit. Use the business plan to demonstrate your understanding of the industry and your particular expertise. You’ll also want to provide the lender with cash flow projections to indicate there will be a steady flow of cash to help repay the loan.

Include Your Personal Credit Record and Tax Returns

While it is generally true that businesses are treated as separate financial entities from the people running them, in the early stages, the lenders are going to want to examine your credit history and income. You should also have copies of your completed tax returns from the past few years in case the lender wants to review your personal income history.

Clearly Identify the Purpose of the Loan

It isn’t enough to say that you want a loan to start your business. Lenders want to know that you have a clear idea of how you intend to use the loan – without this they may perceive that you lack vision or don’t know how to allocate funds. To get past this, identify major pieces of equipment or projects that the loan would be used to fund. Show the lender any research you have on the cost of these items, as well as how you estimate the projects will help generate funds that can be used to pay off the loan.

Determine Your Collateral Capacity

Lenders will want to know what collateral you can use to support the loan. Any assets like property, equipment or something else of tangible value will secure the loan since these things can be sold to generate funds for repayment in the event you default.

Understand the Costs and Payment Structure

Business loans can vary by lender and amount. There can be a series of loan-initiation fees that are due up front; be sure to ask about these and include them when you are calculating the cost of the loan. Shop around to make sure you are getting a good interest rate, and talk to other entrepreneurs to see which banks in your area have offered favorable terms in the past. Make sure to read the loan agreement carefully to ensure you understand when the money is due, what late fees apply, whether you’re allowed to pay it off early, and other rules of this kind.

Do You Need a Guarantor?

Banks tend to be very conservative, and may not be open to lending you money if you have no history of running your own business. You can use an outside investor to secure your loan, but there are certain issues that come along with this decision. Guarantors will be putting their personal assets on the line to assist with your loan, either because they have a personal relationship with you, or because they believe in your business model.

Traditionally, guarantors are called upon if you can’t make your debt payment. In this case, make sure you have a written agreement explaining your obligations to the guarantor should you default. When a guarantor wants equity in your business rather than loan repayment, for example, he or she is called an angel investor.

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