Obtaining your first small business loan
Warren Mueller
Recently, I had the opportunity to sit down with Brent Jussel, the Senior Loan Consultant for Panhandle Area Council, Inc. in Hayden to talk about how small business owners can go about getting their first business loan to start a new business or scale up an existing business. There are two typical scenarios for these loans: either you have expertise in a certain area and now want to start your own business, or, you have been running a business for a couple of years and now want to significantly scale up that business.
1) What loans are available for small businesses? The Small Business Administration [SBA] partners with commercial lenders to offer SBA-backed loans. The key sources for these loans are your local commercial lenders and the folks at Panhandle Area Council.
2) What size loan will a business owner need? First determine the total amount of assets and working capital needed. Equipment, inventory, new construction or tenant improvements to a leased space, professional fees for architects, and of course any working capital (cash) needed to get the business started. Commercial lenders and SBA will require you to fund from 10% to 30% of that total amount from your own resources. This is called your Equity. The commercial lender will then consider your loan application for the rest of the project capital.
3) How do I apply for a loan? Select a local commercial lender that is SBA approved and make an appointment with their commercial loan officer to discuss your business goals and investment needs. Also, ask if they lend for your kinds of purposes. They will then tell you what they need for an application. Brent and Panhandle Area Council can help you navigate the process — no cost!
4) What is typically required for the Application? A Business Plan is required. Your North Idaho SBDC can help you develop one. In addition, three years of tax returns both personal and business [if applicable] along with a personal financial statement, and a current credit report.
5) My credit score could use some improvement — is that a problem? It depends. If you can give a good explanation for a lower score [medical expenses, unemployment], that will be taken into consideration. Similarly for a bankruptcy or a criminal record. Upfront disclosure of these issues and how you have moved beyond them demonstrates your integrity to the lender.
6) I have found the perfect location for my business. Should I sign a lease now? Be careful here! Signing leases, franchise agreements, or any other contract should really be done with a contingency clause that voids the contract IF you do not get the loan. You do not want to be obligated to a three-year lease if you are turned down for a loan! Also, check into city/county zoning laws for your location and intended use. Talk to city planning commissions, health department, or any government agency that may have regulatory authority for your business. You need green lights from all these entities to ensure your location is viable. Ultimately, you should obtain legal advice before you sign any contract or agreement.
7) I have submitted my full application, now what? The lender may take 30-60 days to process the application. In the meantime, keep working on your business planning, being careful about spending money or signing contracts. Also, do not take on new debt at this point! Defer buying a car, a house, a vacation home until AFTER your loan is approved and funded. Do not quit your current job if the income from that job will help support your personal expenses and debt service.
8) The lender has approved my loan. Does this mean I get a big check from them? No. Typically, as bills come due from contractors, vendors, architects, attorneys, you will submit those to the lender for payment.
9) The lender declined my loan application. Does this mean my business ideas are dead? No. A loan can be declined for many reasons that have little to do with the merits of your ideas. Your North Idaho SBDC can help analyze the reasons for a loan denial and identify other lending sources that may be more favorable toward your particular business idea.
Remember, everything connected with the loan application process is about convincing the lender to invest in your idea. Courtesy and professionalism in dealing with the bank helps to demonstrate you are the type of person they want to lend to. Your North Idaho College SBDC can be a strong resource to help in the loan application process. You can reach out to them at https://nisbdc.com/ or by calling 208-665-5085.
• Check out Training & Webinars at NISBDC.com/trainings-workshops/
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Warren Mueller is in his sixth year as an SBDC Business Coach. He spent 25 years in international business development in the defense contracting and specialty chemical industries. He is also a consultant in Strategic Pricing and Pricing Management. In 2014, he published a book on Strategic Planning for small businesses and nonprofits.
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