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Securing a Small Business Start Up Loan

Before your credit union or bank will agree to grant you a small business start up loan, you will need to convince them that your new business is a good credit risk. The questions they will want answered are: how much money do you need, how will you use the money, and how will you pay it back?

The best answer for all of these questions is to write a business plan. A fully developed, written business plan will reassure a potential lender, because it will do more than answer the basic questions that a lender must ask to weigh a loan application; beyond those questions, a good business plan will allow your potential lender to truly assess your business model and its chances for success. The plan will also demonstrate that you have used a methodical approach to analyze all aspects of the business, before you have approached the lender for financing.

Of course there is another, even more important reason to write a business plan, and to do it long before you are looking for financing. The writing of a business plan will help you focus on, and detail each step of the process, from planning your business, to setting up its operation, to strategies that you will use to enter and succeed in your market. Any time you spend on a business plan will be time well spent.

Understanding the position of a loan officer will help you grasp what will be important to him or her. It is the loan officer who will advocate for the issue of a loan for your new business. To do that, the officer must feel certain that he/she has fully documented that the business has a plan in place that is conservative and practical. That is why you should also supply a loan proposal, along with your business plan, when you apply for a small business start up loan.

A loan proposal can be thought of as an action outline for your business plan. The document sticks closely to what the loan money will be used for, and how that application of funds will directly affect the business in a positive way. Here are the basic elements that you should include in your loan proposal, which you would submit along with your business plan and the actual loan application:

General Information: Name of business and business address, name of principals, Social Security numbers and addresses for all principals.

Purpose of Loan: Brief, succinct explanation of why the exact loan amount is needed, how the money will be used, and how the money will increase profits, productivity or growth of the business.

Business Overview: What your business is, how it is structured, what your plan is to succeed in your market niche, and whatever research or analysis you have amassed to support your views. Include profiles of your products, your customers, your competition, and your strategies to succeed in your market.

Management Profile: Profile all member of your board and all company officers. Highlight what qualities and experience they bring to the decision-making process within the company. Also include a brief overview of management's goals for the future.

Financial Information: Balance sheets or projected balance sheets, which show all expected outgoing payments as well as projected income. Personal financial statements for all owners of the company. Any collateral that is to be pledged as security for the loan.

It is possible to apply for a small business start up loan with much less documentation than what is described above. But a thorough presentation of your business model and your management team is certainly the best way to win the confidence of any potential lender.

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Information here does not constitute a legal advice. Please contact an attorney or accountant for specific expertise.

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