Start Up Business Loan Beginner’s Guide – What You Should Know Before You Borrow

If you are considering a start up business loan to finance your new venture, be certain that you have all the facts. Fully understanding the commercial loan process is paramount to making the right decision.

Let’s explore the 5 key factors which shape the entire loan approval process.

Key Factor #1: Do you have a sound business plan?

In addition to the loan application paperwork, a commercial lender will need to see your small business plan. You must prove that your business is viable on paper and demonstrate exactly how and when your new business will turn a profit. No reputable lender will hand over a loan check without first ensuring that your new business will have the ability to pay back the borrowed funds.

Key Factor #2: Do you have good personal credit?

Even with the best possible small business plan, it is highly unlikely that you will be approved for a start up business funding without a reasonable credit history. A lender determines the lending risk by evaluating your personal credit worthiness. Please understand and consider that you are entering into a legally binding agreement in which you promise to make timely, scheduled repayments. Your past credit history is the only evidence available to a potential lender, indicating how you have repaid other debtors in the past.

Key Factor #3: What collateral do you have to secure the loan?

Notice I didn’t write “do you have collateral”. You absolutely must have collateral to be approved for a standard commercial loan. This also includes SBA guaranteed loans. Please believe me when I tell you that the US Small Business Administration is not in the business of guaranteeing “high risk” commercial loans. A commonly used source of collateral for a start up business loan is the equity in your home, or other real estate you may own. Therefore, the start up loan is secured on this real estate. If you fail to repay the loan, your property may be at risk.

Key factor #4: What are you planning to use the money for?

In addition to demonstrating that you have need of a loan (in other words, you do not have other means of obtaining the funds to start a business), you must also indicate to a lender what you will be spending the money on. The lender must approve of how you intend to spend the loan. If you wanted to spend your start up business loan on research and development, the lender must approve. No matter for what or how you intended to spend the loan amount, it must be approved by the lender.   This is usually spelled out in your small business plan.

Key Factor #5: What if you decide to repay the loan early?

Did you know that you can be hit with prepayment penalties of as much as 5% for paying off your loan early? This even applies to SBA guaranteed loans. Keep in mind, lenders are in business to make money. They only make money on interest repayments, not the principal loan amount. If you pay your loan off too early, they will lose out on potential profits!

Some Potential Problems…

What is you have poor credit or don’t own a home? Are you still able to secure a start up business loan? The answer is likely no. You can however check out alternative lending sources, such as peer-to-peer lending groups like Prosper or Loanio.

What is the Solution?

The solution is to find a sound alternative to taking out a BIG bank loan in the first place. Consider bootstrapping your new business. As a Start Up Business Consultant, I help budding entrepreneurs find low cost alternatives to loan financing. Clients who have purchased my eBook have found the money they need for small business success. You can find absolutely free sources of business start up funding to make your dream of small business ownership a start up success story — even if you have bad credit or don’t own a home!


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