One of the most significant hurdles in starting any kind of business is the amount of cash you need to start. Most people think businesses require hundreds of thousands of dollars in funding to get off the ground!
In reality, we started our business with just $3,000.
It's true that starting a business feels like a huge leap of faith, no matter what! When you first hit publish on your website or land your first client, it feels like the floodgates are about to open. It feels like you need more infrastructure, more employees, and more cash in order to support the incoming deluge of clients! Wouldn't a loan help you get the money you need to start things off the right way?
In contrast to how Launch Day feels for most entrepreneurs, customers don't actually start rushing to your door offering barrels of cash in exchange for whatever you're selling when you click publish on your that announcement Instagram post.
For that reason, you probably don't actually need as much money in the bank as immediately as you think! It's okay for your business to start as a side-hustle while you steadily gain new clients and allow your company to bring in enough for you to take a cut. While this type of slow burn might not be a good strategy for everyone, the truth of starting a solid business is that it takes a lot of time and a lot of patience. Even when you're doing everything the "right way".
Every business has a unique story. When it comes to getting a loan for your business, you might fall into one of three categories: Starting, Scaling, or Buying.
Are you starting, scaling, or buying?
So, you're in the market for a business loan. The first question to consider is... why?
This isn't just philosophical waxing about why you've chosen to seek out funding; it's a legitimate question that you're going to be asked when you apply for funding. Why are you looking for money, and furthermore, why should the bank give it to you?
Your story is an important beginning point to consider when seeking out any sort of business funding.
Starting from Scratch
Perhaps you've been thinking about starting a business for years and have simply never had the time or financial ability to pursue your dream. You've worked out the kinks in your idea, developed comprehensive financial projections, and have a bulletproof business plan that you'd like to implement. The only remaining hurdle?
There are plenty of ways to start your business without jumping in full-time in the beginning. You can take on a small number of clients that are manageable on a smaller scale. You can outsource your work. You can even create a waitlist or collect pre-orders to build interest in your company before launching in order to generate a little bit of startup capital.
If you've exhausted every opportunity, it may be time to seek outside funding in order to get your business off the ground.
Trying to Scale an Existing Business
Your business has been chugging along for a few years and you're starting to feel that crucial pinch of not being able to do enough on your own. It looks like you'll need to hire. Still, you're not interested in hiring just one person; your business has been growing at an unprecedented rate and you believe it's time to take things to the next level.
There are often overlooked opportunities to create some extra cash within your business outside of simply getting new customers. You can expand contracts with existing customers, create add-on services, sell knowledge-based courses, and more.
Still, when it's time to grow quickly and efficiently, you can't always get around the fact that you just need more money to do it.
Searching for a Business to Buy
Starting a brand new business from scratch can feel like a huge hurdle. For some, a better path into business ownership is actually purchasing an existing business that's for sale. This route allows you to enter into an already mature (or in the process of maturing) organization with a history of sales and most likely an established reputation.
There's a lot that goes into purchasing an existing business. Letters of intent, purchasing and confidentiality agreements, auditing financial statements, and more... In short, you'll need an excellent and extremely competent business lawyer to guide you through the transaction.
If you're choosing to finance your business purchase through a government-sponsored loan, you may want to connect directly with a banker in that specialty to fully understand the ramifications.
How to Find Financing
There are several options when it comes to financing that most people are actually unaware of, not just loans from the SBA!
- Marketplaces like OpenGrants are excellent resources for finding small business grants to build your business, often for free or just an application fee.
- The Small Business Administration has created Small Business Development Centers all around the US to help business owners access invaluable resources. They can help get you connected to funding, assist with your strategy, and make sure that your business is growing and flourishing.
- If you're going directly through the SBA, check out their Lender Match program which connects you directly to a lender that can assist with your financing needs.
- Find outside funding using resources like FundStory to connect with different types of commercial lenders and other capital resources.
Get Your Paperwork in Order
Once you've decided how to approach funding your business, it's important to have everything in order. If you're applying for any kind of outside funding, organizations often want to see things like a business plan, financial statements, and more.
Specifically, if you're pining after an SBA-backed loan, you'll need to prove that you're a for-profit, small business (a very stringent qualification) operating in the United States. You'll have to have exhausted all other options for your business (like your personal resources) and demonstrate that you're in need of a loan. Of course, any kind of loan that is given must be used only for a sound business purpose.
Finally, you'll need to compile a list of actual documents for your application:
- SBA Form 1919: The borrower information form.
- Both SBA Form 912 (statement of personal history) and SBA Form 413 (personal financial statement) to determine your eligibility.
- A current and up-to-date profit and loss statement and supplemental schedules from the past three years.
- A one-year projection of income and finances and an explanation of how you expect to achieve this projection.
- A list of names and addresses of any subsidiaries and affiliates, including concerns, in which you hold a controlling interest or that are otherwise connected to you.
- A copy of your original business license or certificate of doing business.
- Records of any loans you may have applied for in the past.
- Personal and business income tax returns from the past three years.
- A personal resume for each owner.
- A history and overview of the business and its challenges including why you need the SBA loan and how you think it will help.
- A copy of your business lease, or a note from your landlord, with the terms of the proposed lease.
If you are buying an existing business, gather the following information:
- Current balance sheet and profit and loss statement
- Federal income tax returns for the previous three years
- Proposed bill of sale including the terms of sale
- Asking price with schedule of inventory, machinery and equipment, and furniture and fixtures
- Franchise, jobber, or licensing agreements
- Proof of equity injection
Because of all of these requirements and stipulations, it's incredibly important to work with an advisor who is able to educate and advocate for you and your business. It's often incredibly wise to work with an accountant or bookkeeper to get some financial projections done or make sure that your current books are in order as well!
After all of your documents are prepared, you've met with a lender, and you've answered every question possible about your business, the process begins to move. You may also be required to put up some form of collateral in order to qualify for the loan. The process can range widely in the amount of time it takes to complete, but once approved, you can receive funding within a matter of weeks.