Start-up Business Funding- Know What Lenders Are Looking For

Grassroots businesses are rapidly sprouting up across the globe as increased access to technology, information and opportunity have combined to open the door for anyone with a great idea to launch a start-up venture.

While this relatively new branch of business has hit the ground at a sprint, getting the funding to turn this dream into a reality is key. Anyone with a dream and a creative vision can hypothetically launch a start-up but they may not have the capital or experience to do it alone.

Gaining the funding to back that concept is a hurdle that needs to be overcome, and being knowledgeable on business loan options is the first step to this journey.

Business Funding Options

A plethora of options exist for start-ups to secure business financing, from traditional bank loans and venture capital to crowdfunding and business grant options. Explore the recommended tactics below from the Small Business Administration.

  • Business Credit Cards - This is a quick and straightforward means for startups to gain access to funds. Business credit cards are also a fantastic way to boost business credit while offering flexible payment options.
  • Microloans - Got a modest start-up idea that doesn't need a lot of capital to get rolling? Enter microloans. These miniature versions of a traditional business loan typically cap out at $50,000 while being easier to secure compared to traditional business loans.
  • Crowdfunding - Technology and a globalized society have paved the way for this attractive means to secure funds. This not only gives individuals a way to broadcast their cause or project while raising money, it's a great way for startups to attract investors. With more than a handful of crowdfunding sites out there, the opportunities are expansive.
  • Personal Business Loan - Rather than tackling the arduous task of getting a traditional business loan, it's possible to instead opt for a personal business loan, which will be made out to the individual, based on their personal credit. This is also typically much faster than the business loan option and takes only a few days.

What Are Lenders Looking For?

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From capacity to personal character and even collateral, there is a multitude of key ingredients lenders consider when determining credit risk for a business startup loan.

Explore the 5 c's of credit below to discover exactly what lenders are looking for.

  • Capacity - This sums up a business or individual's ability to pay the loan back and looks at cash flow, potential profit, and even the ability for the loan recipient to make monthly payments. For new startups, this means providing a well-researched business plan that includes cash flow projections.
  • Character - A solid business plan will only get a person or business so far. Having a good character that remains resilient in the face of challenges and a can-do attitude is a crucial pillar of business success and one that lenders will look for in a candidate. However, this doesn't just mean having confidence, it means having a good personal credit score and evidence of good past behavior with both business and personal interactions.
  • Collateral - While the capacity to pay back a loan is vital, having collateral is also a key ingredient that lenders look for as it gives them reassurance that there are secondary assets to protect their money, should the startup fail.
  • Capital - This is essentially what the business or start-up is bringing to the table and covers personal investment into the business, other assets owned personally or the business, and any savings. This gives lenders confidence that the loan recipient not only has their own cards on the table but the means to repay the loan if profits don't roll in as projected.
  • Conditions - The ins and outs of the loan, where the money is going, how it's being used, and how it will improve the business factors into this all-important C of credit. Lenders sometimes consider external conditions as well including the local market, the economy, and the industry.

5 Tips to Consider

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Once the business idea has been hatched and the lending source ascertained, it is then up to the start-up to put together an outstanding and foolproof application to secure funds and put the whole operation in motion. Consider the top tips below for creating a great application.

1. Have an Actionable Plan
All lenders want proof of a clear purpose and plan for the loan that outlines as many specifics as possible for where that money will go. If the money is required to secure machinery, for example, the applicant needs to explain clearly and concisely what that machinery will do and how it will benefit the businesses' overall ability to generate profit.

2. Don't Ask for More or Less Than You Need
Overestimating or underestimating expenses is equally as dangerous during the loan application process. Instead, spend time crunching the numbers to get an accurate estimation of the startup financing required. Be sure to factor in tax and any shipping and handling costs for example and remember to keep everything transparent and realistic.

3. Offer Up Collateral
Some lenders will require collateral before they dole out a loan, so be sure to research these requirements and prepare an additional document that spells out each asset that can be offered as collateral. This further assures lenders that the applicant has a personal stake and something real to lose.

4. Ensure Every Document is Meticulously Filled Out and Included
Loan applications require a swathe of additional documents to verify financial history and validity. While these required documents will vary depending on the lender, they typically include bank statements, income sheets, profit and loss reports, a statement of owner's equity, tax returns, collateral documentation, business licenses, and registrations, articles of incorporation, commercial licenses, franchise agreements, and owner resumes or backgrounds.

5. Create a Cash Flow Projection
Forecasting cash flow based on meticulous research will work wonders on generating lender confidence. Using past cash flow statements can further strengthen this section of the application.