Many would-be entrepreneurs set out to open a small business, assuming they will be able to secure any money they might need along the way by pursuing small business loans. However, obtaining a small business loan is not a given. Before embarking on the process of starting up a company with loan financing, there are a handful of important facts you should be aware of to safeguard your rights and help you plan for the process.
The Process Will Likely Be Long and Tedious
Applying for small business loans is an arduous task. You will need to have a well-developed business plan and thorough financial projections. You should be ready for potential lenders to grill you by preparing answers to any questions they might have. Identify any weaknesses in your plan beforehand, and have strategies in place to bridge any gaps before you approach lenders.
Know that the first bank you approach will most likely reject your application. You might apply to 50 banks before you find one to lend you money. Don't give up, and consider each application a learning opportunity.
Your Personal Finances Will Play a Part
If you don't already have robust business credit (and most startup businesses do not), your personal credit will play a major role in whether or not you'll be able to obtain a loan. If your personal credit leaves something to be desired, hold off on applying for a small business loan until you can somewhat repair your credit.
When you do finally get a small business loan, understand that even though it is in the name of the business, you will still probably have to sign a personal guarantee. This means that if you default on the loan, the bank will be able to come after your personal assets. As such, ensure you have a strong strategy for maintaining cash flow and an emergency plan in place for the business.
You Have Rights
Though it might feel like the bank holds all the power when it comes to small business lending, borrowers have rights, too. It might take some fight on your part, but make sure you advocate for fair conditions. Don't settle for terms that seem predatory.
Your rights as a small business owner include:
- Transparent pricing and terms presented in writing for simple comparison to other options
- No debt traps or loan products that snare you into an expensive spiral of borrowing
- Responsible underwriting; i.e. lending to support the success of the business, not to set the business up for default
- Fair treatment and transparency from brokers
- Adherence to fair lending laws to avoid discrimination
- Fair and respectful collections practices
It's true that money doesn't grow on trees – Obtaining a small business loan will take time and hard work. If you persevere and treat the process like a learning experience, you'll emerge wiser and with the capital you need to take your business to the next level. And keep your rights in mind to ensure lenders don't take advantage of your need and passion to grow your small business.