Strategies for Obtaining a Small Business Loan

Small businesses are critical to the American economy. For small companies to survive and generate new jobs, they need credit on affordable terms. If you've considered starting a small business, have you thought about how to fund it? Borrowing money is one of the most common sources of funding a small business. Before you approach your lender for a loan, it is a good idea to understand as much as you can about the factors the bank will evaluate when they consider your application.

The Federal Deposit Insurance Corp. (FDIC) offers the following tips to help improve your chances of getting a good loan.

Prepare or update a business plan.
This summary of the company's goals, needs and financial projections will be crucial to your success, whether you're just starting out or you've been in business for years.

The U.S. Small Business Administration (SBA) offers the following tips for writing a solid business plan:

• Begin with a statement of purpose. You should be able to explain your business in 25 words or less.
• Illustrate how your business will work and why it will be successful. List the owners.
• Describe the company's products or services, the customers, the market and the competition. List the managers and their credentials.
• Supply three years of projected financial statements. Include income, loss and cash-flow projections.
• Provide supporting documents, such as references from creditors and potential clients and suppliers, and evidence of insurance.

Understand the risks and costs of different kinds of loans.
Your best option may be a bank loan guaranteed by the SBA. Under this program, the SBA backs a certain portion of the loan -- as much as 90 percent -- which enables a small business owner to qualify for attractive interest rates and financing.

Credit cards may appear to be an easy source of money, but they can be an expensive way to finance a small business. Don't make the mistake of using high-cost credit, such as personal loans or credit cards, to fund business operations when you can get a better rate on a business loan from your bank.

Home equity lines of credit also may be a source of funding, but you may not want to risk your family home to launch your business venture. Before going this route, carefully consider the risks involved. Likewise, think carefully before co-signing or guaranteeing a business loan for a friend or relative.

Know your options.
There are generally three types of business loans: short-term loans to be repaid within approximately three years (including lines of credit used to help finance ongoing expenses), intermediate-term loans typically paid back in five to seven years (often used to purchase machinery, furniture or fixtures or to finance renovations and expansion), and long-term financing that can be available for 20 years or more (typically for commercial mortgages for buildings or major equipment purchases).

Don't overlook state, county and city governments when you're looking for financing. Many economic development offices have lending programs for qualified small firms that may offer special terms.

Learn from other professionals.
The SBA provides loan guarantees, referrals to local free or low-cost counseling and training, tips on how to write a business plan, and other support for small businesses. For more information, call the SBA at (800) 827-5722, go to www.sba.gov or contact the SBA District Office in your area.

The FDIC also offers a toll-free hotline at (855) FDIC-BIZ (or (855) 334-2249), which responds to questions or concerns about credit availability for small businesses. At www.fdic.gov/smallbusiness, you will find useful information and an online form to ask the FDIC a question or register a concern.

Your banker also may be able to provide advice on how to expand your business or refer you to other local sources of assistance.