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Need a Small Business Loan? Try These Strategies
Small businesses — from people who merely "work for themselves" to entities that employ others — are critical to the American economy. And for small companies to survive and generate new jobs, they need credit on affordable terms.
While many small businesses have had difficulties obtaining credit in recent years, conditions are getting better. "A combination of factors has created issues and challenges for small businesses, but it is turning in terms of credit availability. I think it is going to get better, and we're working to facilitate that," FDIC Chairman Sheila C. Bair said when the FDIC held a forum on January 13, 2011, to discuss new approaches to overcoming obstacles to small business lending.
FDIC Consumer News has written before about how small business owners can improve their chances of getting a good loan. Here is our latest collection of tips.
Prepare or update a business plan. This summary of the company's goals, needs and financial projections will be crucial to your success, whether you're just starting out or you've been in business for years. "Small businesses need a well-prepared business plan when they apply for a loan," said Suzy Gardner, Assistant to the FDIC Chairman. "A poorly prepared plan could lead to more money being borrowed than the business can realistically repay or the loan being denied just when the small business needs that money the most."
The U.S. Small Business Administration (SBA) offers tips for writing a solid business plan. Among them:
Understand the risks and costs of different kinds of loans. Your best option may be a bank loan guaranteed by the SBA. Under this program, the SBA backs a certain portion of the loan — as much as 90 percent — which enables a small business owner to qualify for attractive interest rates and financing.
"SBA loan guarantees can mean the difference between getting a bank loan and being entirely shut out," said Mary Bass, an FDIC Senior Community Affairs Specialist. She noted, though, that "with an SBA loan or any other loan, expect to show that your business has sufficient cash flow to repay what you want to borrow."
Credit cards may appear to be an easy source of money, but they can be an expensive way to finance a small business. Don't make the mistake of using high-cost credit, such as personal loans or credit cards, to fund business operations when you can get a better rate on a business loan from your bank.
Home equity lines of credit also may be a source of funding, but you may not want to risk your family home to launch your business venture. Before going this route, carefully consider the risks involved.
Likewise, think carefully before co-signing or guaranteeing a business loan for a friend or relative. "Remember, you are making a promise to repay the loan if the borrower doesn't," warned Luke W. Reynolds, Chief of the FDIC's Community Outreach Section. "If the primary borrower defaults on the loan, you will have to repay it — plus interest and fees — and if you fail to do so, your personal credit record will be damaged."
Shop around for the best deal. Most commercial banks offer SBA loans. Start by asking the bank where you have your personal accounts and follow up with a few banks that market themselves as lenders to businesses of all sizes. Accountants, attorneys, insurance agents, trade associations, vendors and business peers also may be able to provide referrals to lenders.
Regarding business loans, in general there are three types: short-term loans to be repaid within approximately three years (including lines of credit used to help finance ongoing expenses), intermediate-term loans typically paid back in five to seven years (often used to purchase machinery, furniture or fixtures or to finance renovations and expansion), and long-term financing that can be available for 20 years or more (typically for commercial mortgages for buildings or major equipment purchases).
And don't overlook state, county and city governments when you’re looking for financing. Many economic development offices have lending programs for qualified small firms that may offer special terms.
Learn from other professionals. The SBA provides education and counseling through a variety of programs and partners. "It's not enough to give small businesses the money," SBA Administrator Karen G. Mills said in her remarks at the FDIC forum. "They need to do the business plan. They need help. They need mentoring. They need advice to succeed." She noted that the SBA has "a network of over 14,000 counselors" who can assist small businesses. To learn more about the SBA's programs, see For More Help or Information for Small Businesses.
Whether or not you borrow from a bank, you also should establish a working relationship with a financial institution that offers deposit accounts or other services you may need. Your banker also may be able to provide advice on how to expand your business or refer you to other local sources of assistance.
Also, if you have a question or a concern about getting a loan, the FDIC has resources that can help. See For More Help or Information for Small Businesses for details.
"Every small business started with a dream," Reynolds said. "You can nurture and grow your dream with a few common-sense strategies, starting with a good business plan and then consulting with your bank about what deposit and credit services it offers to help you along the way."
Last Updated 2/23/2011