Every entrepreneur needs access to funding at some point in their journey.
Some folks are lucky enough to have the money they need from the start. But in most cases, it takes a little help to go from the idea stage to building and growing a business.
SOAR Innovation is launching a 3-part series to help entrepreneurs like you to discover and access different types of business funding:
- Part 1: Small business loans
- Part 2: CDFI loans
- Part 3: Angel investing
Today, we’re discussing small business loans.
Why are business loans so common? What are the pros and cons? Who’s a good fit for a small business loan, and why?
This post will explore the answers to all these questions. And if a loan is right for you, we’ll also provide a few tips to help increase your chances of securing one.
What can you do with a small business loan, and why might you need one?
Cash is one of the most important resources to help your business grow.
Early in your entrepreneurship journey, you might need cash to conduct research, build a prototype, or hire staff.
An entrepreneur further along in their business might use the extra cash to expand their team, enhance existing products, or increase marketing efforts.
A small business loan — issued by a local, state, or national bank — can address these needs by temporarily improving your cash flow when you need it.
But, it’s only useful if you use a small business loan to earn your business more money in the long run. Otherwise, you might be spending money for the sake of it.
Considerations for small business loans
Small business loans aren’t free. It takes 3-10 years to pay off a small business loan. And you’ll have to pay back the principal plus interest.
When you seek out a small business loan, you have to deliberate on why you need it and how you’ll spend it.
You shouldn’t spend a small business loan on products or activities that aren’t likely to give you a good return on investment, such as:
- Expensive office space
- Unnecessary, expensive technology
- Personal items
Keep these considerations in mind when evaluating whether a small business loan is right for you:
- Make sure you have enough cash flow. Check your financial statements and income projections to know how much you can reasonably afford. You have to pay back a loan in monthly installments.
- Don’t accept loan terms you can’t pay back. Taking out a loan you can’t repay creates the risk of losing your business. If a bank offers you a larger loan than your budget allows, ask them to reduce the loan amount. Don’t accept an interest rate you can’t afford. Interest rates over 10% are unsustainable for most businesses. Use a loan amortization calculator to discover how much interest you’ll pay over the life of a loan.
- Make sure the interest rate is fixed, not variable. This means you might pay a lot more interest over the life of the loan. Watch out for variable rate loans and avoid them at all costs.
- Avoid early repayment penalties. With this term, you might get hit with a fee if you pay the loan off early. See if the lender is willing to forgo this term. Otherwise, you might want to pass on working with them.
- Watch out for predatory lenders. Unfortunately, there are people out there taking advantage of small businesses in rural areas. Before taking out a loan, determine whether the lender is accredited by the Public Protection Cabinet Department of Financial Institutions.
Checklist: Is a small business loan right for you?
- Are you ready to grow your business – but can’t pull it off without an infusion of cash?
- Do your income and cash reserves give you plenty of room for paying back the loan, including during your slow months?
- Are you concerned about the tradeoffs of an equity investment, such as giving up partial ownership and decision-making power to a third party?
If you said yes to all of these questions, a small business loan might be right for you.
How to apply for a small business loan
Step 1: Prepare to apply
Banks will perform due diligence to assess whether you’re a worthy borrower. They’ll look at your financial history and business plan, financial records, and future projections. Make sure this documentation is readily available.
Know how much you need to ask for. Be ready to explain how you’ll pay back the loan. You’ll need to pay a monthly payment (principal + interest) until the loan maturity date. Make sure your current cash flow can accommodate this payment.
Step 2: Identify a lender
Interest rates for small business loans will vary based on the size of the loan and your personal creditworthiness.
You can identify a lender from these trusted banks in Eastern Kentucky.
SOAR also works with several lending partners that work in our region:
Credit unions may also be a good fit for a loan because their missions include supporting their surrounding communities.
The Small Business Administration offers a lender match program to help you find a competitive rate.
And on the state level, KEDFA small business loans support businesses in manufacturing, agribusiness, service, or technology fields.
Step 3: Schedule a discovery call
Take the time to get to know your potential lender by scheduling a preliminary phone call. Find out if they’re invested in Eastern Kentucky entrepreneurs and why.
Take this time to learn what criteria they look for in successful applications. It never hurts to ask. This could be the first stepping stone towards a long and productive relationship with your new lender.
Step 4: Prepare your application
Once you identify your top lender, it’s time to build a strong application. Providing as much hard data as possible will help establish trust with your new lender.
Be truthful and straightforward, too. Any reputable lender will look into the information you claim.
Ask a trusted partner to review your application before sending it in. They’ll help by providing a second set of eyes, catching any errors, and ensuring you’ve completed the process correctly.
Conclusion: Learn more about applying for a small business loan in EKY
A small business loan can be the resource you need to get your idea off the ground. But there are a few other options to access the capital you need to grow your business.
We can also help you strengthen your business funding applications by reviewing them and providing constructive feedback. Contact us to get connected with your local representative.