Starting a small business can be a great way to build your income, do what you truly love, and make steps toward self-sustainable revenue. However, you’ll need more than a well-thought-out business plan to get started with your new endeavor.
Although financing a small business can seem complicated, it doesn’t have to be. When you need to supplement your initial capital for your business, here are five tips to help you finance a small business and begin your new adventure.
1. Make Sure Your Personal Finances Are in Order
Banks will consider your personal finances and debt when processing your application for a small business loan. Applying for a loan with a significant amount of debt means you’ll likely need a co-applicant to prove to the bank that you can pay the amount back.
Having your personal finances in order gives you a better chance to secure the small business loan you need to start or expand your business. If you don’t have enough assets or you have a lower credit score, you may have to pledge your personal assets to satisfy the bank’s requirements and secure a loan.
2. Be Prepared to Contribute Some Costs
It’s unrealistic to expect a bank to provide you with the full amount of money you need to support your business. All small business owners will need to invest some of their personal finances to start or continue their business.
As such, it’s essential to have enough personal equity to supplement the loan. However, you’ll also need to consider ways to pay the money back in the event of unforeseen circumstances with your business—these should be part of your business plan that you update over time.
3. Know How Much You Can Afford
There’s how much you can afford to pay back every month, and then there is the amount the bank will loan you. You’ll need to determine what is realistic for you based on your personal finances, business plan, and expenses.
Once you estimate your monthly costs, you can better understand how much you’ll need for a loan and how much you can afford to pay back. If you’re merely expanding your business, you should have a more accurate idea of these numbers that you can show to the bank for your loan approval.
4. Understand the Lender’s Requirements
As with any loan, it’s important to know if you qualify for certain business loans before applying. Check the lender’s requirements and, if possible, do your best to exceed them. Traditional banks generally want to see a good credit score and a minimum monthly income, and some will want to see that you have been in business for some time—typically two years or more.
If you’d like to get a Small Business Administration (SBA) loan from the government, you’ll need to be a legitimate small business and a for-profit company. Knowing the requirements of the loan you’re going for can save you time and ensure you have the best chance of getting approved for the amount you want.
5. Consider Alternative Financing
Although going the traditional route with a bank can certainly work when financing a small business, this won’t be a viable option for every company. Alternative financing provides a way for business owners to get the capital they need without getting a traditional bank loan.
Many small businesses and microbusinesses turn to alternative financing because it allows them to start a business without having to prove their success to a traditional lender. For example, you may be able to consider community development finance institutions, venture capitalists, angel investors, invoice financing, and microloans for financing your small business.
Consult With a Professional
Before financing a small business, consulting with a professional can help you have a clearer picture of your finances, what you can afford, and what your best options are for securing capital. At Scharf Pera & Co., PLLC, we provide financial and new business consulting for those wanting to jumpstart their company with the right financing. Contact us today to get started.