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Getting a Business Loan
In order to get a business loan, you need to complete a long list of steps. Many lenders require the owner to complete a full business plan as well as financial statements to submit with the application. The lender also needs a business profile summarizing the company, including employees, revenues, and contact information as well as information about the owner. The lender checks both the business and individual credit score. In order to get approved for a business loan the business owner may have to provide collateral or prove that he has funds to put toward the business idea besides the loan money.
Lenders take on significant risks when they lend to businesses. Some business structures, like corporations and limited liability partnerships, limit the owner’s liability for debts related to the business. So if the owner defaults on the loan, the lender may not have much recourse for recovering the funds. For this reason, many lenders have strict application and approval rules—especially for start-up companies that do not have any history of revenues or business success.
Chance of Approval
During a credit crunch, when lenders are reluctant to lend
to anyone, it’s very difficult to get a business loan. The total amount banks lent to businesses fell from $740 billion to $670 billion between 2008 and 2010. Certified financial planner Velda Eugenias explains that as of 2010, "The [banks] have tightened their lending policies, and it is more difficult for an entrepreneur to get financing.” You need to have a solid application and exceed all requirements to have a chance at approval. It’s generally more difficult for a start-up business to get funding compared to an established company, and if the owner or company management has a history of financial missteps, that could also make it very hard to secure a business loan.
Improve your chances of approval for a business loan by bettering your personal credit scores and history. You should also save up money to put toward the business to show potential lenders that you’re vested in the business idea. That means that you’ve personally put your own finances at risk. If rejected for a small business loan, you’re eligible to apply for an SBA (Small Business Association) loan. Explore other options for getting business financing, like business credit cards or investments from family members and friends.