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Home / Startup / Funding a Startup / 4 Top Tips to Economically Fund a New Small Business
4 Top Tips to Economically Fund a New Small Business

4 Top Tips to Economically Fund a New Small Business

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Jul 26, 2019 By Ryan Kidman

Before 2008, small businesses could easily secure funding. Everything changed once the Great Recession took hold. The days of easy funding ended in a matter of weeks. Banks experienced the worst credit crunch in over 70 years, which took its toll on many aspiring companies.

The economic reality for small businesses gradually improved in the 10 years since the recession came to a resolution. Lenders subsequently became somewhat more likely to extend loans to business owners. However, many business owners still struggle to secure adequate financing.

New businesses face the most difficulty getting loans. According to the Small Business Administration, the loan approval rate for new businesses is 33%.

The approval rate isn’t the only issue that small businesses need to worry about. They also need to make sure that they can get a low with a reasonable APR, so they can afford to repay their loan. This is becoming a greater concern as the Federal Reserve starts to ease its monetary policy.

Companies that need startup capital must cover all of their bases. Here are some tips to maximize the chance of getting approved for a loan and get the lowest possible interest rate.

Estimate Your Monthly Payment Before Applying

You won’t know your exact monthly payment until you have been offered a loan with a specific interest rate and repayment date. However, you can make a reasonable approximation of your monthly repayment obligations. This is going to be necessary to put together a repayment plan, which any lender worth their salt will want to see.

The NerdWallet business loan calculator can help you make this estimate. You will need your credit, loan amount, estimated APR and loan term. When you create the loan repayment plan, make sure that you tell the lender what APR you used to reach your estimates. They will view your application more favorably if you overestimate your APR, because that indicates that you are ready to plan for the worst case scenario. This will lower your risk profile, which should help you get a working capital loan for a reasonable APR.

Save a cash reserve to cover the first six months of loan repayments

Lenders don’t really care about the fanciness of your business model. At the end of the day, their only question is how you will be able to repay your loan.

They want to see that you have taken all reasonable precautions to make sure you can cover your future obligations. The best way to provide this assurance is to have a cash reserve on hand to cover a few months’ worth of payments. They will see that you understand the reality that it is going to take a while to generate enough revenue for your business to be self-financing. Having cash on hand could also lower your interest rate, especially for a shorter-term loan.

Support financial projections with clear data instead of flowery assumptions

Lenders recognize that the average small business owner is not especially financially savvy. The DotCom bubble of 2000 also taught them that business owners tend to be overly optimistic with their future cash flow forecasts.

Lenders are going to be apprehensive about giving a loan to a business that has unrealistic financial expectations. You can alleviate their concerns by providing well supported data for your financial forecasts.

Several entrepreneurs that I know work in the online publishing vertical. If they were trying to secure a loan to find a new project, they would maximize their chances by showing the following:

  • The average cost per click of keywords in their niche (this data is readily available in Google Ads Keyword Planner)
  • The average search volume for keyboards that drive traffic to those pages
  • Data from previous social media campaigns showing how much traffic can be generated with a particular strategy
  • Click through rate data for the type of online publication they are using, which would help them calculate the total revenue along with the estimated cost per click and search volume

Lenders don’t want to hear your unsupported opinion about the amount of revenue your business will generate. They want to see revenue projections that are based on clear data.

Consider fronting collateral

Collateral is one of the “5 C’s” that lenders take into consideration before issuing a loan and setting interest rates. They recognize that they can seize physical assets to cover loan obligations in the event of a default.

You will have an easier time getting a low interest loan if you can back it up with other assets. When you are trying to get approved, it might be ideal to claim that you will use the loan to purchase long-term working capital. Your odds of getting a low interest loan will probably be higher if you are purchasing capital that depreciates slowly.

Filed Under: Funding a Startup Tagged With: Funding, Lenders, Startups

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Ryan Kidman

Ryan Kidman is a startup-investor and serial entrepreneur. Founder of Catalyst For Business and contributor to search giants like Yahoo Finance, MSN. He is passionate about blogging and covering topics like big data, business intelligence, startups & entrepreneurship. Follow him on twitter: @ryankhgb

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