The High Cost of Small Business Loans on 02/21/2011

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Whether you need startup financing for a new business, or funds to support a business already in operation, these days personal business loans can be hard to come by. Banks have tightened their belts on all forms of lending. If you’re looking for a small business loan, follow these steps:

1. Consider banks and loan types carefully:

Just because big banks aren’t lending doesn’t mean a traditional bank loan is out of the question. Small community banks generally did not wade into the financial quagmire that has engulfed their larger counterparts. Small, healthy banks are still lending.

Along with choosing a bank, you must choose a loan option. Not all banks offer “small business loans” specifically. Instead, you may be taking out another type of loan, such as a home equity or a personal loan, to finance your business venture. Research the key lending rates in your area, and be realistic about what you can afford.

2. Be prepared:

No matter what bank you approach, they won’t just hand you a loan. Prepare the following:

- Debt-to-equity ratio: What is your business’s total debt? What is its total equity (value when all debts are paid)? Be prepared to explain your calculation and show all debts and assets.
- A down payment and/or collateral: Just like buying a house, a down payment and/or other collateral will be required to secure your small business loan.
- Business plan and financial statements: This should show exactly how much money you need and exactly how it will be used. If you’re a start up, your business plan will be especially important.
- Your track record: How has your business performed in the past? What’s your credit history?

3. Be realistic about costs and look for alternatives:

A traditional bank loan is going to come at a cost. From the down payment/collateral you’ll commit, to the interest that will accrue, your loan agreement will have significant costs beyond the loan principal. Are you ready to take on a high-interest personal loan, mortgage your house, or invest your savings? Can you get a better deal elsewhere?

Consider this: Many small businesses don’t get their startup capital from a bank. They get it from family or friends. Think about this lending alternative and consider the possibility of angel investors in your inner circle.

4. Do it right:

If you, like so many others, decide to fund your venture through friend and family lending, a legally recognized loan agreement is essential. Before you start, learn all the basics in A Borrower’s Guide to Friend and Family Loan Agreements. Then use LoanBack’s easy to create the loan agreement that is right for you.