Getting Small-Business Loans

Financing your home-based business

An important part of starting any new business is adequate financing. It's not enough to have a great idea. You also need the funds to hang in there while you slowly build your cash flow. The failure rate for new businesses is high and, more often than not, the root cause is shallow pools of money. If you can't survive for a year without any income, you might want to think twice about heading out on your own.

If you absolutely must start your own home-based business and don't have enough cash from personal resources, there are several things you can do before heading to the bank in search of a small-business loan. The first and most likely group to approach is your network of contacts. Would any of your family, friends and work associates invest in your business? When approaching people you know for financing, it's best to produce a well-researched business plan that speaks to the future and has real, achievable goals.

If you're not having success with those closest to you, widen your search to professionals such as accountants and lawyers who are used to dealing with small-business clients. They might not be able to invest in the deal themselves but may refer you to a network of contacts who can. Persistence is the key here. Eventually, someone is bound to see the merits of your plan. Always remember that investors sometimes say no to pitches for reasons other than the obvious. Just because they turn you down doesn't mean that they don't see the merits of your plan. It just doesn't work for them. Thank them and move on to the next possibility.

Other possible ideas for securing nontraditional small-business loans include economic development agencies such as the Small Business Association, angel investor networks, potential customers, and other government-sponsored small-business programs. A good plan properly executed will always find interested investors.

If you do go to the bank for financing, here is a list of things they will take into consideration when assessing your application:

  • What is your character like? How reliable a manager will you be with their money? Banks will look at your strengths and weaknesses very closely. Be honest about what you can or cannot do.
  • What is your business plan and how fast do you intend to repay the loan? The bank here is trying to assess the downside of the loan. Should you not be able to make the business profitable, what are your alternative sources of income (working spouse, other investment income, or ability to return to paid work quickly) to cover interest payments?
  • What collateral do you have to cover the loan should you default? Banks need to protect their investments.
  • What are the current market conditions in your industry? They'll want to know that you have considered the competition and how you will deal with it. Further, if your particular industry is experiencing a slowdown, how will you generate business?
  • Are you personally invested in the business? If you're not putting in your own money, it will be hard to convince others to do the same. Banks generally look for a minimum of 20 percent of the total capital.

Starting your own home-based business won't be easy, and if it's poorly financed, that'll make your success that much more difficult. Take the time to get it right.

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