One of the first things most people think about when they want their own business is, how do I start? Close on the heels of that question is, where will I get the money?
Getting a government small business start-up loan is one solution to the “where will I get the money” question. Be aware, though, that there’s always a price to pay.
In the case of government loans for small businesses, the price you pay is paperwork and bureacratic delays. Because they are dishing out taxpayer money, government agencies must be very careful to make sure that the money is disbursed in accordance with proper regulations, qualifications and restrictions.
Your personal credit history will make a difference
Your small business, when operated as a sole proprietorship, is simply an extension of your personal reputation. As such, your personal credit history will be examined and considered prior to any agency, government or otherwise, providing capital.
Therefore, before you begin the loan application process, be sure to check your personal credit history and take steps to clean it up if necessary.
Return on investment
Even though you may be convinced you have come up with an business idea that guarantees a hefty ROI (return on investment), lenders may not be willing to assume financial risk on your behalf. Banks and government agencies are under no obligation to lend to you, nor are they necessarily going to be as optimistic as you are about your business plan.
How to increase your chances of getting a government loan
1. Be patient and tenacious. Keep files of all your research and meetings.
2. Cultivate relationships with everyone you encounter. Ask people for their name and phone number. Ask for that person the next time you phone. Say to the next person you speak with “Jane Doe from X Department told me… What I’d like to know now is…”
3. Be respectful when making enquiries, especially when speaking with receptionists – they are the gatekeepers for their boss and can really help you get access to the people you want to speak with.
4. Check your personal credit history and take steps to clean it up if necessary.
5. Prepare your written loan application with care. Once your application is declined, you may not get a second chance to make a good first impression.
6. Watch out for internet scams. There are many bogus directory publishers, consultants and web pages dedicated to financial aid for small business. All the information you need is available free from government sources.
Where to start
In the US, go to the Small Business Administration , SCORE or Business Information for Women. These are all government agencies whose mandate is to help you secure financing and succeed in your business.
In Canada, a good place to start is the Business Development Bank. There’s also a great list of resources for Canadian small business loanshere.
What your application will involve
Include a cover letter outlining your business background, type of business, funds requested, terms of repayment and the benefits expected from the monies. Explain your operation in easy to understand, universal terms and try to stay away from industry specific acronyms or jargon.
In addition to the application, lenders will also want to review your business financial statements, personal and business tax returns, projection statements (including earnings and expenses) and copies of any leases, franchise agreements and/or purchase agreements. It’s also a good idea to include copies of letters of reference or letters of intent.
You should be willing to pledge some form of collateral as security. Typical forms of collateral are property, stocks, bonds, and cashable insurance policies. Cash flow projections are also a determining factor, so make sure you have done a thorough evaluation of your business’s earning power.
Glossary of Terms:
Accounts Receivable Financing – A loan gained by borrowing against receivables. Loans are paid down as receivables are collected.
Annual Fee – The amount charged by the lender each year to cover the administrative costs of the loan.
Credit Rating – A predictor of the ability to pay back a loan. The credit rating is a result of credit scoring by a credit bureau.
Fixed Interest Rate – An interest rate consistent throughout term of loan.
Variable Interest Rate – An interest rate modified throughout the life of a loan.
Line of Credit – A specific amount of money a business can borrow against when capital is required.
Personal Guarantee – Guarantee that the primary owner will assume personal responsibility for repayment of the loan if the business defaults.
Secured Loan - A loan secured by specific collateral. Creditor may seize specific property used as collateral to satisfy an unpaid secure loan.
Unsecured Loan - A loan granted upon the good credit of the borrower. No collateral involved.
This article is for information purposes only and should not be construed as financial or legal advice.
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Well i appreciate such Governmental initiatives but i also have my doubts. It’s true, small businesses need to be encouraged, they form an important economical impulse that drains all essential areas. I have my doubts because everything about Government implications means slowing downs and bureaucracy. Entrepreneurs usually search for alternative sources to get loans.