Financing for Small Business: A 6 Step Guide

You’ve got the best business concept or existing successful company: don’t lose the momentum. Whether you’re starting or expanding, you’ve likely come to a point where you know it takes money to make money–and it’s time to consider a small business loan. Before you drive to your bank, source money from friends, or sign up to launch a Kickstarter, you’ll have to assess where your business is and exactly where you want it to go.

Lenders need that information, and they require it in the form of metrics.

How should you prepare that information, why might you need a loan, and what steps should you take to acquire one? Let’s take a look.

Why Do You Need Small Business Financing?

Small businesses often seek financing for one or more of three common reasons:

They’re a New Startup

It takes money to make money, especially when you’re getting started. New businesses need an initial investment to make sure they’re seen–and ready to sell.

They Need to Upgrade or Acquire Business Equipment

A business may own expensive commercial equipment like construction vehicles or industrial restaurant appliances, or they may have an office full of decades-old computers. Either way, it’s time for an upgrade and some new hardware integration to ensure you meet safety codes and provide your team with the most efficient tools.

They are Rapidly Preparing for an Expansion to Meet Projected Growth

Is your business poised to do wildly well? Did you have a huge increase in sales since last year? If so, you may need to prepare (and budget for) a rapid amount of growth.

Financing Options for Small Businesses

Small businesses have multiple financing options. What works best will depend on multiple factors, like credit score, amount of loan required, and the pace of your business’ growth. Here are five options to start with:

Acquire a Bank Loan

The most obvious and traditional method, you can apply for a bank loan to start a small business. If you don’t have a lot of experience or if your credit isn’t perfect, you’re going to have a harder time here, but you can review each bank’s guidelines to get a fair idea of whether you’ll have a shot.

Although we’ve listed this option first, consider this fact: banks are less likely to approve small (under $250,000) loan amounts than they are large loan amounts, so the type of bank you approach and the amount you need can really impact your success here.

Consider a Microloan

Do you need a small loan to start your business? If you just need something to cover costs like a new computer, accounting software, or the proper formation of an LLC (limited liability corporation) in your state, a microloan might help. Paying this back can improve your credit, and since the amount is small, so is the risk–meaning it’s easier for you to get approved.

This is a very popular option for businesses operating online only, as startup costs tend to be minimal.

Fund It Personally

Do you really believe in your dream? Do you have credit available to you personally at a low interest rate? It might be more convenient to simply fund your business personally, then pay yourself back later. We don’t advise emptying a 401(k) unless it’s your last resort, but a low-interest rate credit card is an option, especially if you already have some steady cash flow due to another job (or if your business is already profiting and just needs to expand or acquire new equipment).

Get a Loan From the Small Business Association (SBA)

The Small Business Association fills a gap in financing, and they’re there specifically to help small businesses get financed and supported. If you’ve been rejected from a traditional bank loan, this may be a better option for you. If you’re overwhelmed with the loan application process or you aren’t sure how much you need to borrow and why, the SBA also has resources to help you get there. The SBA also has very specific requirements.

Regardless of whether you use this as a loan source, it’s a wise idea to form a relationship with your local SBA for networking and future endeavors.

Apply for a Commercial Mortgage

Does your business already have assets? If so, a commercial mortgage might be the ideal option for you. You may receive a lower interest rate on a commercial mortgage than on a loan, though this can change with the market.

These are just a few of the options available to small business owners. You can also consider crowdfunding (especially if you have an established brand), mingle with angel investors, and seek venture capital.

While alternative loans are options, they’re typically expensive, with a 15% interest rate still considered extremely low for that segment.

Once you’ve decided you need financing, it’s time to go through the proper steps to secure it. Let’s check out the process from start to finish.

The 6 Steps: Financing for Small Businesses

Step 1: Know Where You Stand Financially

Before you do anything, you need to get your financial house in order. That means making sure you’re current on business taxes and understand where you stand with credit–this will help you apply for the appropriate types of financing. If you’re new to business or running a sole proprietorship, you should focus on doing the same with your personal finances as well.

Banks expect you to know what you have and where you’re going before you ask for help. It may help you to employ a finance expert or accountant at this stage if you haven’t already.

If you’re able to get the basics lined up in the case of a new business (LLC, business bank account), that will help, but you may instead wish to include these startup costs in your requested loan amount.

Step 2: Know Your Needs

Of the reasons listed in the first section, you should know why you’re seeking financing. Additionally, you should have a business plan (especially if you’re new) and a specific budget ready for review. If you need equipment, for example, your line items’ prices should be exact, not estimations. Projections of ROI (return on investment) can also help. Financial institutions like numbers, proven success, and proper financial planning.

Step 3: Get Help

Despite the stereotypes about startup culture, you don’t have to do this alone. In fact, you shouldn’t. If you can’t afford accounting software or financial advice, there are still resources for you. Start with the SBA before making decisions about loan processes (if you’re new to this). From there, you can emerge with a plan of attack for financing your small business.

Step 4: Approach Lenders

Whether the lender is the credit card in your wallet, your parents, or a major banking corporation, it’s time to approach your lender and display the discipline you’ve shown in gathering your materials and working hard to grow your idea into success. Sometimes, it’s simply a numbers game, submitting applications online–but in other circumstances, you’ll have the chance to present yourself well in person.

Step 5: Ready Your Backup Plan

While some loan decisions and options are instant, others take a while. Have your paperwork ready to go for the backup plan so your plans for growth aren’t delayed. Or, if you work with lender services offering multiple options, prepare for a conversation with your financial professional.

Step 6: Track, Grow, and Repay on Time

Once you’ve secured funding, you need to track every detail in your accounting software. Align that with metrics for growth, such as profit, expansion, and even customer engagement. And always remember to repay your loan on time, which may increase your credit and standing, allowing you to secure more loans in the future.

What’s Next For Your Business?

Figuring out the next financial step for your small business is crucial for your success, but you don’t have to tackle this alone. Whether you need financing assistance for equipment, startup capital, or a loan for your next growth phase, it’s time to get started with your financier.

What option works best for you?