Posted by Early Growth
December 24, 2013 | 4-minute read (723 words)
Guest post by Nik Milanovic from Funding Circle USA.
Starting your own business is tough. Whether launching the next big venture-backed startup or a corner store in your neighborhood, running a company requires entrepreneurs to take risks and make sacrifices. But those sacrifices shouldn’t include giving up outside funding and just trying to make do.
Yet more and more, small business owners are finding themselves coming up short when they look for funds to build their ideas into a reality. Small businesses looking for modest loans are out of luck—and normally have to wait months to even find out they’re declined. For many banks, what it comes down to is that $75,000 loans just don’t generate enough interest revenue to make business sense. The average bank SBA loan in 2012 was $337,000—more appropriate for a well-established business with lots of employees than an entrepreneur looking to get his project off the ground.
Even given the tight credit environment, there are steps that startup businesses can take to help them to get funded. Alternative lenders are normally more open than banks to first-time business owners and entrepreneurs looking to get off the ground. For example, at Funding Circle, about half the loans we fund go to startup businesses.
So what does it take to get a startup business loan?
Be sure to have all your documentation prepared before you go to apply for a loan. This means social security information, bank statements, tax returns, titles and proof of ownership of any hard assets (such as a home or car), investment accounts (401ks, IRAs...), and anything else you need to verify your net worth. At Funding Circle, we don’t ask for quite as much documentation; we just ask for borrowers to disclose their net worth, credit score, and annual income, but don’t require the boatload of documentation that banks require upfront. When providing documentation, be sure to dot the i’s and cross the t’s—banks sometimes penalize borrowers who forget signatures or use pencil instead of pen.
2. Solid business plan.
Your idea should have concrete numbers behind it with well-illustrated assumptions about how you plan to get where you want and why that is a reasonable target. Your plan should build from the ground up (say, estimating revenue by projecting the number of customers you’ll have in a year) rather than from the top down. Needless to say, you should also make sure you’re coming out in the black.
3. Prior experience in the field.
It’s often easier for someone who’s worked in the restaurant business before to open up a restaurant than it is for someone who hasn’t. If you don’t have any experience in the field, do some research beforehand and see if you can get some in your own time.
4. Good credit score.
A good credit score and credit history are key to getting your foot in the door with banks. Many banks won’t consider applicants with scores of less than 640 for SBA loans. You can build this score up by keeping your credit balance low, opening multiple credit lines and paying them off, keeping accounts open for long periods, and making all payments on time.
5. Speed and transparency!
A lot of good applications get stuck in the loan pipeline because borrowers are slow to respond. If you respond quickly and provide the best information you can, your chances are much better.
Follow these steps to take some of the pain out of getting your business funded, and improve your chances of getting the capital you need to take your company to the next level.
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Nik Milanovic is a Senior Analyst at Funding Circle USA, a web-based lender focused on small and medium businesses in the United States, providing loans of $25-$500K to high-quality entrepreneurs looking for expansion, capital, equipment purchase, or more general needs. If you have questions about lending or have any tips we can pass along to small business owners, contact Nik at email@example.com!