You have a good idea and a lot of enthusiasm for a new business, but you need money to get it off the ground. In this early stage of development you might want to get a bank loan to fund your new business.
However, it may be difficult for you to get a bank loan to start a business if you have no business history or no prior relationship between you and the bank. So how do you improve your chances of getting a loan in the face of these obstacles?
Key Takeaways
- Getting startup funds via a business loan is an option for business owners who can prove their creditworthiness and reliability.
- Banks are more likely to approve you when you come prepared with documentation and specific uses for the loan amount.
- Your personal finances also play a role in obtaining a business loan, such as your credit score or assets for collateral.
Determine How Much You Need
Being approved for a business loan boils down to reliability and assurance. Banks don’t want to loan money to someone who may not be able to pay it back. When applying for a loan, you’ll want to have a strong case for exactly how much you need and how you plan to pay it back.You can show the lender that you need the amount you’re requesting by:
- Identifying the ‘why’ behind the loan and specific needs it would cover
- Making your estimates for each item as exact as possible
- Describing how each item would support business growth
- Writing a compelling business plan
If you account for every penny in your business plan, you are more likely to have a successful application.
You must show the bank that you understand the market and industry that you are about to enter. As part of the business plan that you present to the bank, you should include a detailed analysis of the market, the customer base, and the broader industry. Include a statement of how much market share you think your business can capture and how that translates into dollars. Based on similar companies in the industry, develop income, expense, and cash flow projections for the business. This will help convince the bank that your firm will generate the cash flow necessary to repay the business loan.
Check Your Personal and Business Credit
One key thing that lenders look for is your personal and business credit score. If you demonstrate creditworthiness through your personal and business credit, it decreases the risk for the lender. The higher the score, the less risky you and your business are to the lender.
Every business has a credit score that assesses past behavior, but some are too new to have an accurate credit score if at all. In that case, your personal credit score is weighed more heavily in the bank’s review.
Review your business credit by going to one of the major business credit bureaus, such as Dun & Bradstreet. Different reporting bureaus scale differently, though 1 to 100 is the most common business credit range. You can check your personal credit score at a major credit bureau, your banking institution, or even on financial apps.
Get Your Documents Together
You should gather or prepare all the documents you want to present to the lender, including a business plan, an expense sheet, and financial projections for the next five years. Make sure you have:
- A detailed analysis of the market, customer base, and the broader industry
- Your market share and how that translates into dollars
- Income, expense, and cash flow projections
Together, these elements show the bank that you understand the market and industry you’re about to enter. Further, it will help convince the bank that your firm will generate the cash flow necessary to repay the loan.
Tip
Do you or any of your business partners have experience in the industry? Share this in your business plan as it creates more confidence from the bank that you know what you’re getting into. You should also include any management or business ownership experience you or your partners have.
Pledge Your Personal Wealth as Collateral
If you are applying for a business loan for a startup, you’ll have a better chance at approval if you pledge your personal wealth as collateral. Some loans require personal collateral to secure them.
If you are a homeowner, you can use your home as collateral and perhaps take out a home equity loan. You can also use other personal assets, such as cars, stocks, or bonds.
Following the four steps above can prove your creditworthiness and make you a reliable candidate for a loan. If you believe in your business and have done the necessary research, a bank will have an easier time saying yes.
Frequently Asked Questions (FAQs)
How do you start a business with no money?
You can get the funding to start a business by taking out a loan from a bank. If you can’t get a bank loan, there are other potential sources of business funding, such as loans from alternative or online lenders, grants, and investors.
Is it hard to take out a loan to start a business?
It can be difficult to obtain a loan for a new business. You’ll want a strong personal or business credit score as well as a solid business plan that will make the lender confident in your ability to repay the loan. If you can’t get a loan from a bank or the Small Business Administration, you may want to look into alternative or online lenders.
