What’s the Best Way To Get a Loan For My New Business?
Perhaps it’s an understatement to say that starting a business is hard work. With countless judgment calls, details to attend to, plans to make, and business-related things to learn, quite frankly, it’s a wonder that anybody starts a successful business.
One of the biggest decisions an entrepreneur with a fledgling business has to make is how to fund their business. Funding is notoriously difficult for business startups to attain; but on the other hand, additional funding could really jump-start your business.
Should you seek outside funding? If so, when? Making those judgment calls can be hard. We’ve asked some successful entrepreneurs how they’ve funded their business, and here’s what we learned…
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Most Start with Bootstrapping
Bootstrapping is not always the most comfortable option. As Jesse Harrison, the founder of Zeus Legal Funding explains, “I would not even buy myself a $1 ice cream because I wanted to save every dollar to start my own business.”
Nonetheless, there are a few perks to self-funding your business.
One big perk is that you don’t have to give up equity in your business. Brandon Doyle, the founder of Wallaroo Media, perhaps stated it best when he said that “To be able to own my company outright with no loans or investment is a great feeling.”
Start Small, Grow Later
Good feelings aside, there is also a practical reason to bootstrap your business: you have time to experiment.
In the early stages of your business, you may not know what works and what doesn’t. If you have a limited amount of cash flow, you have to be more discerning about where that money goes.
Marisa Meddin of The Dessert Place learned this lesson early on:
I have found that the products or services that I may have spent money on from the start (if I had more money at that time) were not actually vital to my business. On the flip side, I have invested new cash flow into assets that, at launch, I didn’t even know would be important to my business.
As such, she advises business owners that “[w]aiting to spend money on products or services that you learn are needed based on actual customer experience will provide a higher ROI for your business.”
The co-founder of VORTTX Training and Testing, Kyle Golding, has a similar story. Golding and his partner wanted to make sure they had a feasible idea before investing money in their business:
Our approach was putting some personal money (neither of us mortgaged a house or anything with risk) into the basics like website, trade show display and digital marketing (less than $5,000 total) to very strategically approach the most likely audience only. This laser focus might seem too risky to some but we knew each limited dollar spent was going directly at a very likely target.
Like Meddin, Golding advises that,
The most important thing to do is determine if you have a profitable business concept, not how fast can [you] get funding for the first version of a product or next great idea. . . . If you play the long game with hustle and patience, you can build something not only profitable but sustainable.
Better to learn what works and what doesn’t before you are beholden to loan payments.
Banks Aren’t Your Only Option…
When you are ready to seek outside financing, you may think that banks are the only way to go. However, that’s far from the case.
For example, Jo Clarkson, the UK Operations Director of The Alternative Board, funded one of her businesses with invoice factoring. Clarkson notes that factoring will not work for businesses with shrinking cash flow, but says:
[W]hilst sales are growing, invoice financing is flexible, the funding automatically increases as your business grows, and if you have a good relationship with your provider, they will often advance additional short term funds to cover temporary extra requirements.
Although invoice factoring will only work for B2B businesses, other businesses may be able to utilize different types of startup-friendly financing.
Additionally, businesses that need to purchase expensive equipment may find that getting an equipment loan or lease will help. Or, if you’re not yet established enough to qualify for business financing, you may be able to get a personal loan to use for entrepreneurial purposes.
…But You Might Qualify For a Bank Loan
Loans from a bank are often more difficult to get than other forms of funding. Typically, most experts advise that you’ve been in business at least two years before applying for bank funding.
However, it is still possible for younger businesses to go the bank route.
When Deborah Sweeney started her business MyCorporation, she decided to finance it with bank loans. Although it was at a time when banks weren’t lending a lot of money (following the 2008 recession), she persevered:
I was not previously an entrepreneur and had limited history of entrepreneurship. One thing I did have, however, was a plan and great credit. I met with many levels of the banking team and ultimately pitched the opportunity to the leaders in the bank. They believed in me and gave me a fantastic loan and not only did I pay it off, we did it in just a couple years!
Although bank loans are often difficult to get, here is Sweeney’s advice to business owners:
I would say the best advice is not to over-do it. Don’t over pitch the opportunity–investors and lenders have heard pitches before. They can read between the lines. Show you have a plan, show the potential pitfalls and let your personality and passion shine through.
In addition to having a solid business plan and acting accordingly, you may benefit from applying to the right bank. According to the survey by TAB, most merchants claimed that small community banks and credit unions were better at serving businesses than a large bank.
Getting a loan from a bank will take time. However, given that banks often offer the best rates and fees, bank financing may still be worth considering.
Knowing when to seek outside funding, and where to get it, is not always an easy decision. Regardless of how you choose to fund your business, the consensus is unanimous: be deliberate. Educate yourself, have a plan for how you’re going to use the money you have access to, and business growth will follow.
Think you’re ready to take the next step into the world of business financing? We have reviews of the best (and the worst) funders in every category, including online small business loans, lines of credit, invoice factoring, cash flow loans, and startup business loans.