Most small businesses do not need a lot of start up capital, especially if they are a service business. They might need to purchase some office, equipment, computers, and furniture.
If you’re moving into an office, you’ll need some money for renovations, unless you can get the landlord to cover for those costs.
Tip: If you choose to get a commercial landlord to do renovations, you will need to sign a longer term lease and a personal guarantee for the entire lease period.
Many service-based business are cash flow positive relatively quickly. However, if you do need financing to start your business and decide to seek financing, here are some things that you need to know.
1.You will need a business plan.
Your banker, will likely ask you for a written business plan (with financial projections), because it is needed to protect the banks interest and demonstrate your entrepreneurial skills and ability to repay the loan.
2. Personal credit.
Your personal credit worthiness is reflection of your ability to pay your bills. Past repayment of debt is an indication of how you will respond toward new debt. If your credit is less than perfect try to repair it before applying for a business loan.
- Be prepared to provide collateral.
Banks, do not take risks; they will always want some form of security. In many cases they may want some form of real estate or other asset to guarantee the loan.
- Personal guarantee.
Most business loans these days require your personal guarantee. Which means you will be on the hook personally if the business closes without settling its debt.
5. Pandemic bank risk tolerance.
The pandemic has most likely changed your banks risk tolerance. Check with your banker to preview your loan request and see what they want.
Trap: I’ve seen banks stop lending to certain industries, due to economic conditions, best check before you do a lot of work on a business plan.
I always recommend that you start with the bank that holds your personal account. This is because they will be familiar with your track record and credit history.
If you have borrowed and repaid loans previously, the bank will already be familiar with you and your assets. It might grant the loan without a full business plan (if you have a solid track record with them) and accept a simple proposal instead. Ask your bank what they need well before you need the money. Remember, point 4, beware of the needed personal guarantee.
Trap: If the bank asks for a full business plan, do it right. Do not try to generalize or create financial projections that are a work of fiction. They will be able to tell. Commercial bankers see many business plans and they can tell the good from the bad and the ugly. Only business owners with a good business plan that demonstrate a well thought out, profitable strategy get business loans.
If you need a framework and some help writing your business plan, get my ebook. It’s a recipe book for business planning and is called “Tips and Traps For Writing an Effective Business Plan”. You can get the Kindle version at Amazon.