It’s very, very difficult to get a first-time small business loan. First-time business owners may obtain their funds through friends, family, and their own assets. Crowdfunding and other forms of lending have arisen to quickly meet the needs of enthusiastic entrepreneurs with a spark of an idea. More and more, fresh-faced millennials are leaning on alternative funding solutions to help them get fast funding for their startup rather than a traditional grant or loan. Then, business owners will apply for a loan or other types of funding, like merchant cash advances, after a year or so of running successfully, when it’s easier to ask for.
However, there are first-time small business loans available from some traditional institutions. It’s certainly not impossible to get one; it’s just difficult.
What Banks Are Looking For
In the unpredictable world of crowdfunding, what the masses look for in a venture can vary widely. But if you look at some of the most successful crowdfunding campaigns, you might see some basic trends: Crowds like cool stuff. They like cool stuff that’s immediately relevant to them. They also like cool stuff from a brand that they like, one that has already made cool stuff that they like.
What banks are looking for, on the other hand, is much more specific and doesn’t really relate to something’s coolness factor (though it may sometimes help). When sifting through applications for first-time small business loans, there are three standard, basic things banks look at. (Keep in mind that different banks have different standards.)
- Whether the loan is for a sound business purpose
- Whether you and your business partner(s) have good character
- Whether you’ll be able to pay back the loan
“Sound Business Purpose”
Nobody likes a pyramid scheme. The lender will need to make sure that you qualify as a business, not gambling, lending, passive investment, or any other type of strange business model. When considering whether or not the nature of the business is reasonable, the banks will look at the following:
- Your business plan (which should be ironclad)
- Your specific products and services
- The size of the business
Also, it’s important to keep in mind that certain SBA-backed loans, like the 7(a) program, will have even more stipulations here. For instance, you can’t apply for that kind of loan if you’re a life insurance company or a marketing cooperative.
It may seem like a strangely invasive criterion, but it’s true that first-time small business loans are awarded partly based on this personal factor. Luckily, banks have formed ways of looking at your character beyond inspecting the cleanliness of your three-piece suit. (That being said, you don’t want to appear unkempt when you’re applying in person.)
- Your credit score and credit history
- Your personal business experience (as shown on your résumé)
- Your personal background (such as prior loan applications, tax returns, etc.)
While you should be enthusiastic, you should also aim to portray trustworthiness and realism. Your projections should sound reasonable, and you should have an air of professionalism.
“Ability to Pay Back the Loan”
A startup loan is very stressful for a bank to back; the likelihood that you’ll pay back the loan is low. This is the aspect of the process that the lenders will likely agonize over, looking over your paperwork very closely.
- Your business plan, including the following:
- Your profit and loss projections
- Your repayment plan
- Your projected cash flow
- Your marketing and sales strategy
- Your SWOT (strengths, weaknesses, opportunities, threats) analysis
- Your personal history in paying back loans
- Your collateral
Collateral is the sticking point for many startup entrepreneurs. If you’re completely new to the world of running a business, your collateral needs may be too high or too risky to get a first-time small business loan. On the other hand, not getting that startup loan may lead you to put those items (like your house) on the line anyway.
Keep in mind that once you’ve been in business for a year or two, opportunities open up a great deal. You’ll be able to apply for more money and more types of loans to fund growth. For example, you’d be able to apply online for BFS Capital’s loans, which are more flexible than many of these other options.