Small Business significantly contribute to the economic development of the United States. In addition to their business challenges, they often run into issues acquiring loans. According to research, the failure rate of small businesses is very high and lack of finance is the major cause of it.
- R. Dickenson reported in “Business Failure Rate,” American Journal of Small Business that about 33 percent of small businesses discontinue within their first year of operation.
- About 67 percent of small businesses fail within their first five years of operation.
- G. Nadu reported in “Profiles of Survivors and Non-survivors of New Business Starts” that better financing would improve the success rate of small businesses.
- The success of a small business is directly proportional to the availability of adequate finance.
How Do Small Business Loans Work?
Lenders consider the following things before approving small business loan:
- Credit scores above 650-700 is fine, but doesn’t guarantee a loan. 700-800 is the recommended minimum score.
- Personal debt payments should not be more than 33 percent of gross monthly income.
- Businesses that have been operational for more than two 2 years and have good reputation can often get unsecured working capital lines and term loans.
- A rating of your company is critical to measure industry risk-based on the government standard industrial classification codes.
- The better the cash flow, the brighter the chance of getting a loan as it supports your ability to repay the loan.
Below are a few things to keep in mind when applying for a small business loan:
- Lenders give loans to those whom they know and trust. Build a relationship with them and let them know about your company before asking for a loan.
- Decide why you need a loan. Is it for genuine reasons, like financing some equipment for your business, or real estate for an office? Or are your reasons trivial, such as trying to finance ongoing losses or purchasing unnecessary business assets? Keep in mind that lenders like veritable reasons with concrete terms.
- Amount of Money Needed. Underestimating the money required leads to problems due to lack of working capital, while overestimation makes lenders doubt your credibility. Be sure to make a reasonable estimate supported by calculated monetary projections.
- Typical documents required for a small business loan are:
- Personal Background: previous addresses, names used, criminal record, educational background.
- Resumes: evidence of management or business experience.
- Sound Business Plan: this is a critical document that should underline a complete set of projected financial statements, including profit and loss, in addition to cash flow and a balance sheet.
- Personal Credit Report: obtain one from all three major consumer credit rating agencies.
- Business Credit Report if you are already in business.
- Income Tax Returns: be sure to include the previous 3 years.
- Financial statements for owners who have more than a 20 percent stake in business.
- Collateral for loans involving higher risk factors for default.
Legal Documents: include business licenses, articles of incorporation, and copies of contracts you have with any third parties, etc.
- Small Business Loan Requirements
Maxine Taylor, the power behind the accounting company, The Balance Sheet, Inc. puts forward her views on the topic:
- “While I am not an advocate going of debt, sometimes it becomes necessary for small businesses. Loans should be for growth, adding new services, not for operating. If you need a loan for day to day operations, then you need to revisit your business plan and pricing.”
- Her firm () has helped business owners in and around West Palm Beach, Florida for over 20 years. The goal: to help these businesses grow strong and clean of financial issues.