While all entrepreneurs are known for their ability to think outside the box, there are some instances when their grandiose plans may need to come back down to earth. One such occasion is when attempting to secure small business financing. Many startups will be focused so much on their great plan, they fail to think about who will fund it.
Fortunately, small business funding is becoming slightly more accessible as of late, but it is still a process. While you may feel like you are calling your dad for some spending money, securing a loan is an incredibly necessary process and should be dealt with early on in the planning process. Included here are a few things to know when securing financing for your small business.
While the small business loan process can be remarkably easy for some people, for others it can be an incredibly long and arduous journey. One entrepreneur did not receive financing until the 60th bank he approached! While he may be an anomaly, it is no secret that the process of developing a winning pitch and finding the right bank could take time.
If you wait until you are ready to start the business, you could be delaying opening day significantly. Begin your loan process as soon as you have a semblance of your business plan. Like securing a home loan, the bank will probably ask you for additional documentation and more throughout the process, leading to an even longer wait time.
In practice, collateral is simply a securing of an asset in order to be insured against an unpaid debt. For example, if a small business is opening up a loan with a bank, the bank will want some kind of assurance, or collateral, that they will be repaid. This collateral could come in the form of proof of owner’s finances, or through rights to the small business owner’s home, vehicle, etc. While it seems incredibly risky to put your home on the line to open your dream business, it is what is required of many entrepreneurs.
Every bank is going to want to have a decent understanding of what your company does and how it plans to make money. To give them solid statistics, you will need estimates and your projection numbers. For example, how many customers do you need to turn a profit? Where can you find them?
Alternatively, the bank may question whether your proposed idea is even necessary or useful in our current economy. They may ask you whether your potential future clients are already receiving what they need from somewhere else. Before heading into bank meetings, it is best to find answers so you can appear competent before the bank’s loan officer.