Inadequate financing is one of the main reasons why 80% of companies fail within the first year and a half. As a business owner, not only do you have to cover all of your operating expenses, but the time and effort required to succeed means you’ll almost certainly have to say goodbye to your day job and regular paychecks. Unless you have saved enough to pay for everything at least 18 months, you will probably have to look for other sources of financing.
However, here we encounter another problem. A recent survey cited by the Credit Union Times found that only about one-fifth of small business owners—about the same rate, by the way, as successful businesses—rely on a small business loan. The survey showed that 62% were afraid of taking a loan, and almost a quarter of the respondents believed that not a single loan would be approved. a A Harvard Business School working paper by Karen Mills (Director of the US Small Business Administration until 2013) showed disappointing statistics. Banks continue to implement measures that restrict lending to small businesses since the outbreak of the financial crisis, because such loans are always riskier than those granted to large companies. Loans of $1 million or less — in the small business space — have fallen 21% since 2008. Such loans accounted for half of all bank loans in 1995, but only 30% in 2012.
So what can you do to get a better chance of getting a loan?
As the saying goes: “The devil is in the details”. Given the more stringent requirements of banks, you will need to come up with a very convincing plan that will show that your business will really be profitable. Every number presented must be backed up by hard evidence or at least some real-world projections supported by in-depth research. There should also be a clear plan as to where the money will go and how it will affect the success of your business.
Apart from this, your personal finances will also be fully scrutinized, so make sure your taxes, mortgages, credit cards, assets and liabilities, and even your credentials are all neat and tidy.
The bottom line is, if you believe in your business idea and have done the necessary due diligence to come up with a sound business plan and budget, there should be no reason why you should not take out a small business loan. Otherwise, you may want to reconsider quitting your day job.