The Details Matter: What to Expect from your First Business Loan
Having extra cash on hand is always helpful when growing your food business. As we mentioned in our resource guide on Start-Up funding, there are many different sources of capital you can turn to give yourself the resources needed to grow your food business. Many small and large food businesses use borrowed capital to fuel growth. A small business loan allows start-up food businesses to pursue new food ideas and passions. Whatever the need is, borrowing capital is a great resource to turn to.
This resource guide shows you the steps when pursuing a small business loan. From learning how banks assess you to filling out your loan application, this guide will cover it all. Let’s explore how to borrow capital to launch your food business!
Step 1: Assessment
Before applying for a loan it is crucial to understand how your application will be assessed to increase your chances of landing the business loan. A bank’s profit off of a loan is determined by whether or not a borrower will make their periodic payments on time. With this in mind, banks assess your credit score, business credit history, cash flows, and time in business.
When growing your own food business, lenders will often look at your personal credit score to determine your creditworthiness. Your personal credit score is an indication to the lender about your historical credit performance; if you have a history of missing payments, it will act as a red flag to the lender when applying for your loan. Check out this blog on business credit profiles.
When assessing your application, lenders will want to ensure that your food business is generating cash flows. Cash flows are a good indication as to whether or not your food business has the ability to make payments on a loan. Lenders may even ask for a prediction of future cash flow to get a sense of how your food business will perform moving forward.
Time in Business
The longer your food business has been operating, the easier it will be to get approved for a loan, especially with a history of successful operations. A positive track record increases your food business’s credibility and the odds of getting a long term loan at a better interest rate. While major lenders will expect to see a longer history of a few years or more, many online lenders will only ask to see a year in business.
Step 2: Loan Options
When pursuing a loan for your food business, it’s important to understand what options are available and which options will best meet your needs. While you don’t need to be an expert on business financing, you should become an expert on choosing the right loan for your credit situation.
Small Business Administration (SBA) Loan
SBA loans range in price from $50,000 to $5 million and provide your food business with lower rates and favorable repayment terms. However, they often have strict criteria to meet and the application process can take weeks or even months, depending on the type of SBA you try to attain.
Traditional Bank Loan
Loyalty to your existing bank can come in handy when looking for a loan. Ask the banks you already do business with and see if they offer term loans or business lines of credit. These loans often have the lowest rates of all options but rigid criteria to meet. The loan amount and repayment periods vary greatly but you should get an answer in less than four months.
These lenders don’t consider your credit to be as crucial as others and only offer loan amounts up to $50,000. The application process is relatively quick; you likely will be approved within three months of applying.
Non-Bank Online Loan
With quick response times and quick access to loans, many food businesses turn to online lenders. These loans come with a price - you must be willing to pay a higher APR with a shorter repayment period. You likely can get a loan between $25,000-$500,000, largely depending on the revenues your food business brings in.
Business Credit Cards
Business credit cards are a great source of capital for start-up food businesses. They provide small loans with industry-standard rates up to 25% and are a great solution for short-term funding. While your existing credit history plays a major role in your approval, they are quicker and easier to get approved for than a typical loan.
Another great source of short-term funding, vendor financing can get you anywhere from $1,000 to $100,000. Some charge no interest, but the repayment period is often very short. These short-term loans are a great way to strengthen your food business credit profile.
Step 3: Gathering Information
Now that you have an idea as to how you will be assessed and the various loan options available to your small business, it’s time to gather information for your application. When applying for a more traditional loan, lenders ask for a wide range of financial and legal documents. These can include:
A copy of your government-issued ID
A resume showing relevant management or business experience
Financial projections if you have a limited operating history
All of these requirements can make traditional loans very time-consuming. If you need money faster, online lenders may be a better fit. They can provide a streamlined application process with fewer requirements and a faster turnaround.
Step 4: Developing a business plan
Lenders want to know how you plan on using the money and to see your ability to make payments and repayments. A strong business plan gives the lender more confidence in your food business and increases your chance at loan approval. Your business plan should include:
Food product/service description
Marketing and sales strategy
Step 5: Providing Collateral
Now that you have gathered all your information and written out the different aspects of your business plan, you are almost ready to apply!
The last step to prepare for is providing collateral if the lender requires it. Collateral is an asset, such as your product inventory or equipment, that can be seized and sold by the lender if you can’t make your payments. It’s a way for lenders to recover their loan if your business plan falls through. Some online lenders do not require collateral but may want a personal guarantee instead. If you don’t have collateral or don’t want to risk losing personal or business assets, you can always pursue an unsecured business loan.
Step 6: Applying!
Now that you have gathered all your necessary information, you are ready to apply! Remember the many aspects of your application, including providing personal and business information, creating a business plan, and providing collateral if needed! Most importantly, plan ahead and be patient! Many loan applications can take months to be approved so it’s best practice to plan ahead to avoid timing conflicts.
This resource guide has guided you through the many aspects of the loan application process. You now know how your application will be assessed, the various loan options available to you, and the best strategies to build a strong application! Now it's time to find the best loan that meets your needs, apply, and launch your food business with borrowed capital!