How to Get a Small Business Loan

If you are wondering how to get a small business loan, you will need to know how to show a lender that you have an excellent chance at repaying the debt. You can do this with a three-part application: first, show you have a good record of repaying debts; second, demonstrate your ability to put in your own capital to the project; third, provide a business plan detailing the likelihood that you will earn a profit from your new endeavor. If you succeed at convincing a lender of these three things, you will qualify for a small business loan.

Credit Record

If you are starting a new business, it will have no credit on its own. You must lend your personal credit to the cause. Your credit score and the credit scores of the members of your board of directors will matter most when establishing the bank's faith in your likeliness to repay the debt. If you have previously owned a business or are looking for an expansion loan, the business credit you established will go a long way to showing your record of good credit. 

Personal Capital

Most banks will require you place at least 10 percent down on a loan; in general, however, 20 percent or more is preferred. A bank requires this down payment for two key reasons. First, it is used as collateral on the debt. If you do not repay, the bank will not refund this portion, and it can at least offset the bank's losses. Second, an investor who has personal capital in a project is more likely to see it through. The bank wants you to have a stake in the success of your business. By putting down collateral, you are sharing in the risk of your new endeavor. 

Business Plan

Your business plan is the most important part of your small business loan application. Even an individual with 50 percent down and a great credit record would not be granted a loan if his or her business plan did not show promise. Your plan should include details on what your business is, how it will be marketed, and the costs and profits associated with the model. More importantly, you must show there is a need for your type of business in the market today. You can do this by showing a lack of other companies in your field. Alternatively, you can show the many ways your competitors are failing at delivering a product, opening a market to you. In any case, the lender will want to see a strong need analysis before extending financing.


If a lender informs you that your business almost qualifies for the loan but does not offer enough default protection, consider applying for a loan guarantee from the Small Business Administration (SBA). SBA guarantees are designed to give borrowers an extra edge when they apply for business loans, and it can be just the push you need in order to get the financing you are looking for. Keep in mind that when you take an SBA loan, you receive many financial benefits, but the stakes are high. If you default, you will be in debt to the federal government, and this debt will not go away in bankruptcy.

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