When launching or growing a small business, securing financing can be one of the biggest challenges. There are various financing options available to entrepreneurs. Below are 12 smart tips to help you navigate the process of obtaining a small business loan, along with additional funding alternatives and advice from successful entrepreneurs.
12 Smart Tips for Getting a Small Business Loan
- Demonstrate Your Ability to Repay the Loan
Lenders want to know that you can pay them back. If you’re a new entrepreneur, proving this can be challenging. Ensure that your financial records are in order and provide detailed financial projections in your business plan. Be realistic—avoid exaggerating expectations. If your business is already generating revenue, have evidence ready to support your ability to cover expenses and loan payments. - Be Prepared to Personally Guarantee the Loan
Most small business owners don’t have enough business assets to fully secure a loan. Lenders often require a personal guarantee from business owners and co-signers, meaning you may need to pledge personal assets like savings, property, or investments. - Your Personal Finances Matter
Lenders will assess your total debt service ratio, which includes both personal and business debt obligations. If you already carry significant personal debt, a co-signer may be necessary to strengthen your application. - Be Honest About Your Financial History
A less-than-perfect credit history won’t necessarily disqualify you, but being upfront about past financial difficulties can help lenders assess your risk profile more accurately. - Borrow the Right Amount
A common mistake is borrowing too much or too little. Businesses often fail either because they are underfunded and can’t sustain operations or because they take on excessive debt. Carefully assess how much funding you need to cover startup costs and early working capital. - Understand That a Lender Won’t Cover Everything
Small business owners should have some personal investment in their venture. Relying solely on lenders is unrealistic, so ensure you have alternative sources of funding, such as personal savings or investor contributions, to handle unexpected challenges. - Have a Solid Business Plan
Your business plan should clearly outline your operations, market, and financial projections. Lenders want to see that you understand your industry and have a realistic strategy for growth. Consider seeking help from non-porfit organizations like SCORE mentors or Small Business Development Centers (SBDCs). - Don’t Expect Lenders to Help You Write Your Business Plan
Banks and lenders will not guide you in developing your business strategy. Use free resources like some of the ones we provide on our business resources page to refine your business plan and financial projections. - Learn Basic Financial Skills
You don’t need to be a finance expert, but understanding cash flow, balance sheets, and profit-and-loss statements is essential. Free resources, such as MOBI’s Accounting and Cash Flow courses, can help you strengthen your financial literacy. - Explore Different Loan Options
Each financing option has pros and cons. Banks offer low-interest loans and credit lines but require strong credit and collateral. Online lenders may have more flexible requirements but often charge higher interest rates. SBA loans (backed by the U.S. Small Business Administration) provide competitive terms but have strict eligibility criteria. - Understand the True Cost of Borrowing
Some alternative lenders use nontraditional interest rate calculations, such as “factor rates,” which can make borrowing seem cheaper than it actually is. Always convert lending terms into an Annual Percentage Rate (APR) to compare the true cost. - Consider Community Development Financial Institutions (CDFIs)
CDFIs often provide funding to underserved businesses. Check with your local economic development office, SBDC, or bank’s small business lending department to find active CDFIs in your area.
Other Ways to Finance Your Startup
If securing a traditional business loan is difficult, consider these alternative funding options:
- Grants and Competitions – Look for small business grants from government programs, private foundations, and corporate competitions.
- Angel Investors – Individuals who invest in early-stage businesses in exchange for equity.
- Venture Capital (VC) – VC firms invest in high-growth startups but usually require a significant ownership stake.
- Crowdfunding – Platforms like Kickstarter and Indiegogo allow you to raise funds from a large audience in exchange for rewards or equity.
- Business Credit Cards – Can provide quick access to funding but should be used cautiously due to high interest rates.
- Revenue-Based Financing – Investors provide capital in exchange for a percentage of future revenue instead of fixed loan payments.
- Friends and Family Loans – Borrowing from personal connections can be an option but should be structured with clear terms.
Mark Cuban (Shark Tank, Dallas Mavericks) – “Sweat equity is the best startup capital.” If you can’t secure funding right away, invest your time and skills to build value.
Applying for a small business loan requires preparation and a clear understanding of your financial situation. Demonstrating business knowledge, keeping an updated business plan, and seeking expert advice can improve your chances of approval. If traditional loans aren’t an option, explore alternative financing sources. Remember, successful entrepreneurs adapt and leverage multiple funding strategies to achieve their goals.
