Small businesses can typically borrow from commercial banks, various organizations affiliated with the Small Business Administration (SBA) or other Internet-based lending companies. The first step in the process is to determine financing needs and how the business will use the loan proceeds. The next step is to write a sound business plan listing business objectives, financial projections and how the business strategy is aligned with financing needs.

Then, consider various credit factors that can improve chances of obtaining a loan, such as the presence of collateral, positive cash flow potential and strong resource management tools. Next, assemble documentation for a loan that includes various legal and financial documents. Finally, compile a list of lending organizations and start contacting and meeting with them to gauge who is interested in providing you a loan and on what terms, before you settle on the best available match.

Financing Needs

Before contacting a lender, carefully evaluate your financial situation, and determine the purposes for the loan. In particular, figure out how much cash flow the business generates and what main areas need capital infusion. The business may need to expand. The business may be starting from scratch and in need of financing to purchase capital assets and finance working capital, such as buying necessary inventory, paying vendors and covering other fixed operating costs.

Depending on the nature of a business and the financing need, lenders can demand different compensation for the assumed risks. If the business operates in a cyclical industry and asks for a loan to purchase capital assets, the interest rate is typically higher. On the other hand, a noncyclical business, such as a food producer asking for a loan to finance inventory purchases, can expect lower cost of loan.

Business Plan

Preparing a business plan is one of the most important steps in the loan application. The document should outline the purpose of the business and how it operates, and it should contain historical financial statements and financial projections three to five years ahead. The business plan should also outline how the business intends to grow revenues and profits in the future. A thorough plan helps both parties in the loan. Step back and think carefully about key elements for the success of the venture.

While there are many tools that assist in preparing a strong business plan, the SBA's Business Plan Tool is a helpful resource for any small business owner.

Other Credit Factors

When preparing for the loan application, consider credit factors that can improve the chances of obtaining a loan. Demonstrate that the business generates sufficient cash flows to cover operating expenses and pay for the loan principal and interest in the future. If there is collateral that can be pledged for the loan, it can assure a lender that there are other source of the loan repayment.

Demonstrate solid resource management in the form of effective managerial character and capacity and strong key managerial metrics, such as positive working capital, low debt-to-worth ratio and a proven track record of debt repayment.

Loan Documentation Checklist

Lending organizations disclose a documentation checklist for a small business loan application, which typically includes various documents such as bank statements, personal and business credit reports, income tax returns, commercial leases, business licenses, articles of incorporation, personal background and resume.

Contacting Lenders

After completing all of these steps, identify financial institutions and start contacting them to initiate personal interviews. A bigger pool of prospective lenders means better chances for a successful loan application. Consider organizations affiliated with the SBA, which are typically able to provide financing at a lower cost due to U.S. government guarantees.

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