Business Loans

By Bethany Ramos

Sure, you may have the ultimate dream of starting your own business, but how much is it going to cost you? A lack of proper financial planning is one of the quickest ways to sabotage your efforts as an entrepreneur and cause your business to fail before it gets off the ground.

How much does it cost to start a small business?

Any costs that you incur before your business opens its doors to customers are categorized as start up expenses. To put your best foot forward as a new business owner, it's important to create a financial plan, preferably with the help of a financial consultant.

You can better calculate how much seed money you will need to open your business based on several factors

• Start up costs (mentioned above), i.e. marketing materials, logo/business card design, location leasing/rental, site renovations, legal support, and much more.
• Business assets in cash, furnishings, equipment, and inventory.
• Financing in loans and capital investments.

Depending on the type of business you plan to open, startup financing needs could range considerably. Low cost small business start up ideas that require little to no financing may include freelancing, selling wares on Etsy, and consulting; opening a brick-and-mortar retail store will cost considerably more and will require more in-depth financial planning.

Preparing for a small business loan

You can prepare for the loan application process by:

Making a plan: What do you need to buy? How much will it cost? Get quotes that you can present to your lender to show that you know what you're talking about. Know the income of your small business over time, as well.

Calculating repayments: Your lender will need to know how you plan on repaying your small business loan. Knowing the maximum payment you can afford and the exact loan amount that will allow you to operate comfortably will show your lender that you are a responsible small business owner. Have the financial statements and cash-flow projections for your small business ready for your lender's review.

Gathering all necessary documentation: In order to successfully apply for a small business loan, you need to have basic documentation ready for loan processing and approval. A lender will appreciate your attention to detail in completing your loan application in advance. You can also draft a professional loan proposal that summarizes your business profile, the loan amount requested, repayment projections, and a backup plan for loan default.

Steps to securing the small business loan

A loan won't fall in your lap, though - obtaining a commercial loan does require a good deal of legwork and preparation. That's because your ability to secure a loan greatly depends on how well you present your company to your prospective lender, starting by:

Have several key documents on hand before you even set foot in a bank. These should include personal financial statements, tax returns, monthly cash flow projections, and a well-prepared business plan. Established businesses should also produce references from suppliers and customers.

Supply a well-organized plan of how you intend to use the loan. For a start-up company, this might involve listing the expenditures and inventory that you need to purchase. For a manufacturing firm looking to purchase a building, this might entail explaining what the building will be used for and how it will be used to increase revenue.

Understand your contribution amount. As a general rule, banks will never provide 100% financing. Start-up companies typically must contribute at least 25 to 35% of the costs. Contribution requirements can vary, however, depending on the stability of the business and the value of the collateral used to secure the loan.

Consider alternatives. While providing more collateral is one way to increase your chances of securing a loan, additional alternatives can help to reassure a reluctant bank. As mentioned above, the U.S. Small Business Administration works in conjunction with banks to guarantee a variety of loans for small businesses. SBA loans are especially advantageous to businesses that have tight cash flow, as the terms of such loans can often be extended far longer than those of a comparable bank loan.

Go to the higher-ups. You can also improve your chances by finding out who will make the final decision regarding your loan. While this decision may fall into the hands of the bank officer you deal with directly, more often than not it will be made by a boss or a loan committee that relies on the bank officer's ability to tell your story. If the bank officer that you're dealing with has little lending experience, it might work to your advantage to schedule a second meeting and ask to have a higher-level officer involved.

Tips to remember during the process

Here are some steps you can take to improve your chances of getting a small business start up loan:

Establish trust. The first thing you'll want to do is try to establish a relationship with the lender sitting across from you. The more they know you as a person, the more they'll trust you. And when it comes to asking for a small business start up loan, nothing is more important than trust.

Refine the start up business plan. Make sure your business plan is optimistic, but don't sugarcoat potential problems or risk. Be thorough about your plans for the future, address contingencies, and talk about the qualifications of your management team. The business plan is one of the primary documents that lenders use to gauge the stability and future of your small business, and it is essential in securing a small business start up loan.

Choose the right size small business start up loan. Avoid asking for more or less money than you need. You shouldn't write your business plan to justify the amount you want - instead, use your business plan to determine how much you need.

Find the right small business start up loan lender. Some lenders focus on small business start up loans - these are your best chance for success if you fit the mold. If they're familiar with your industry, all the better.

Although calculating the start up cost of a small business in order to qualify for a loan may seem overwhelming at best, the good news is that you can deduct start up costs for your new business come tax time. Eligible start up expenditures that may be deducted in a small business tax return include the cost of investigation or acquisition for a new business, as well as expenses incurred when preparing for operation.