Need Startup Funding? Six Questions to Answer to Get a Business Loan
Are you or have you been thinking about starting a business, or purchasing an existing one? It’s a big decision and a significant commitment—of time, energy, and, of course, money. When it comes to financing, you don’t have to do it alone. Here are a few questions that you’ll need to answer in order to secure a loan for your business.
1. HAVE YOU REGISTERED YOUR BUSINESS?
You’ll need to register your business with the State of Vermont. On the Vermont Secretary of State website, you’ll find a step-by-step guide to help you register your business in Vermont.
There are a few official, legal documents that you need to complete when forming a business. Speak with your accountant and/or attorney to determine whether your business will be a sole proprietorship, a Limited Liability Company (LLC), or a corporation. Each one has different implications (including taxes) for you and your business. The Secretary of State site provides additional information to help you understand the different types of businesses that you can register as.
Depending on your business type, you may need to take additional steps to register, such as:
- Register with the Internal Revenue Service (IRS) to get an employer identification number for tax purposes.
- Establish a Vermont Corporate or Business Tax Account.
- Establish an Employer Tax Account (if you have employees).
2. DO YOU HAVE A BUSINESS PLAN?
Creating a business plan can be an intimidating thought. Although there are templates to simplify the process, it takes extensive research and detailed planning to put together a solid business plan.
What industry are you in? How is that industry doing in the current market? Who is your competition? What is your experience in this industry that will help your new business succeed? And last but certainly not least…What kind of revenues do you expect to generate?
Having thoughtful and thorough answers to these questions are important for your business’s success—and not just for the actual day-to-day operations of your business. Your business plan and (realistic) revenue projections will be critical to getting initial financing. It’s one of the most important factors that a lender uses to evaluate your loan application.
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Lenders will want to know how you plan to use the money, with details of the loan purpose and how you expect it to generate revenues. You should include financial projections and goals and show that your business has or will have the cash flow to cover loan payments on top of your existing expenses.
At the end of the day, your business plan should cover:
- A description of your company, including competition, market share, and an explanation of your product and service.
- An introduction to your management team and staff.
- An operations plan for inventory and/or facilities.
- A marketing and sales plan.
Ultimately, it should be a working document that you use to guide your business on an ongoing basis. For more information about writing a business plan, check out this great resource on the SBA website, which includes formats and sample business plans.
3. WHAT’S YOUR CREDIT HISTORY?
As with any loan, you want to have a solid credit history. Lenders want to see how you have handled debt in the past—in other words, proof that you are responsible with your financial commitments. In the event that you aren’t in business by yourself, lenders will also look at your business partners to understand their credit histories.
If you don’t have an ideal credit history, start working on improving your credit score, little by little. In the meantime, you can still get a loan but may not get as favorable terms.
4. WHAT ASSETS DO YOU HAVE?
Unfortunately, businesses don’t have a 100% success rate (we wish!). Your business assets can serve as collateral that mitigates the risk for the lender and makes it easier for you to secure that loan.
What do I mean by assets? This can include a vehicle, real estate property, and equipment used by or to be acquired by the business. For any assets that you plan to use for collateral, you'll likely need an appraisal to include with your loan application.
5. ARE YOU PREPARED TO INVEST IN YOURSELF?
Lenders will not provide you with 100% financing based on your business plan. As a business owner, you should be prepared to put some of your own money into the business. This shows that you believe in the business enough to risk your own money. Like a down payment on a home before you take out a mortgage, many lenders expect you to invest about 20% for a typical term loan.
6. WHAT OTHER HELP CAN YOU GET?
In addition to the resource links sprinkled throughout the blog, there are other places you can turn to for help.
The Vermont Small Business Development Center (SBDC) has a page of helpful tools if you’re starting a business. There are advisors who can assist you, cash flow projections, and guides to developing new ideas to grow your business.
The Vermont Chamber of Commerce, local/regional Chambers of Commerce, and organizations like Vermont Businesses for Social Responsibility also offer a wealth of knowledge and connections to existing businesses in our state.
As for that loan? Know that the SBA and many lenders want to help you. New businesses strengthen our communities by stimulating the local economy, creating jobs, and bringing vibrancy to downtowns and Main Streets.
Whether it’s providing financing for your startup venture or helping navigate the SBA’s loan programs, lenders are here to make starting and financing your business easier. By having answers to these seven questions, you’ll have everything ready to apply for and—fingers crossed—get a loan for your business.
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The views and opinions expressed in this blog are those of the authors and do not necessarily reflect those of VSECU.
About Deanna Carroll
Deanna Carroll is a business lender on VSECU’s VBiz team. She has a broad range of skills and experience from 32 years in the banking industry, including business lending, consumer lending, investments, and regulations. She loves to build relationships, dig into business analysis, and share her knowledge about management training and staff development. Deanna also has firsthand experience with small businesses, as both her husband and son are small business owners. She lives with her husband of over 30 years in Rockingham, Vermont.