Small business financing (also referred to as startup financing or franchise financing) refers to the means by which an aspiring or current business owner obtains money to start a new small business, purchase an existing small business or bring money into an existing small business to finance current or future business activity. There are many ways to finance a new or existing business, each of which features its own benefits and limitations. In the wake of the recent financial crisis, the availability of traditional types of small business financing dramatically decreased. At the same time, alternative types of small business financing have emerged. In this context, it is instructive to divide the types of small business financing into the two broad categories of traditional and alternative small business financing options.
Here's a simple yet practical guide on how to go about preparing to apply for a small business loan.
1. What criteria do banks look for in making small business loans?
Different banks or lending institutions may have different standards, but in general, in order to consider your application for a small business loan, banks will require:
•The loan must be for a sound business purpose. For SBA-guaranteed loans, the business must be eligible based on size, use of loan proceeds and the nature of the business (no lending, speculating, passive investment, pyramid sales, gambling, etc.)
•You and your partner(s) are of good character, have experience and good personal and/or business credit history
•Ability to pay back the loan- reasonable to strong collateral (personal and business assets) is very important. SBA expects the loan to be fully secured, but we will not decline a request to guaranty a loan if the only unfavorable factor is insufficient collateral. And of course, owners must have personal equity investment in the business/skin in the game.
Money is the lifeline of any business, so whether you're starting a business or running an existing one, securing financing is a major factor, especially for small businesses.
SBA small business loans range from about $5,000 (microloans) to $5 million (largest guaranteed) with the average loan around $371,000.
5. How can you get financing to start a business since many banks want to fund growth?
Start-ups are probably the most difficult ventures when it comes to securing financing. Many start-up businesses seek financing from family, friends and credit cards. If the credit is sound, the business plan strong and you have enough personal resources to invest and collateral to guarantee, smaller, community banks and other community financial institutions and Credit Unions may consider lending you money.
Your best bet by far is SBA assistance. Begin by visiting SBA's website , where you will find a wealth of information not only on how to secure a small business loan but equally importantly, other services and training opportunities to help you succeed.
6. Are there associations that can help?
SBA works closely with a large network of partners that leverage SBA resources and are just one phone call away and ready to provide extensive help.
•SBA District/Branch Offices-- at least one in every state
•SCORE-- (approximately 300 chapters nationwide)
•SBDCs -- Small Business Development Centers; (approximately 900 locations nationwide; associated with higher education institutions (colleges and universities)
•WBCs- Women's Business Centers (approximately 100 educational centers nationwide)
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