Starting and growing a small business can be a daunting task, requiring significant financial investment and resources. For many entrepreneurs, securing the necessary funding to help their business expand – or get it off the ground in the first place – can be a challenge.
That's why many business owners initially tap into their own personal finances. However, that move can inadvertently create a host of additional financial obstacles. According to a recent survey, 32% of small business owners have had their personal finances affected by their business, and 89% have personal debt related to their business.1 These factors can have negative repercussions both personally and professionally.
“An infusion of external financing from a business loan can relieve that anxiety, while often helping a small business grow faster and more efficiently,” says Susan Pomplas, Vice President and Business Banking Relationship Manager for First Horizon Bank.
Here's what you need to know.
Business Loans Are Crucial Tools to Help Achieve Goals
A bank loan can be an effective way for small business owners to access the capital they need to build and grow their businesses, and many entrepreneurs are pleasantly surprised to realize just how flexible these small business loans can be.
In fact, they can be applied to a wide variety of needs, including many small businesses might not have considered. For example, funds can be used to invest in marketing, hire more personnel, upgrade equipment, or obtain the latest technology.
Pomplas adds that they also can be used to purchase a property for the company's operations or finance a car or specialized commercial vehicle, such as a truck, motor coach, or heavy equipment.
Types of Small Business Loans
There are a number of different kinds of business loans, and choosing the right financing option can be challenging. That's where a business banker can be a key source of information to help sort through the specifics regarding terms, interest rates, collateral requirements, and more, so you can make an informed decision about the option that best suits your business goals and current financial picture.
According to Pomplas, a few of the types of loans you might consider are:
- Term loans for functions such as purchasing furniture, automobiles, equipment, real estate, and machinery or for construction such as buildouts and remodels.
- Lines of credit, which are ideal for short-term revolving needs such as working capital and seasonal financing.
- U.S. Small Business Administration ( SBA) loans, which are administered through institutions like First Horizon Bank and backed by the SBA to reduce risk. There are two types of SBA loans: SBA 7(a) Loans and SBA 504 Loans, each with their own terms and conditions.
SBA loans have a number of benefits, adds Pomplas. “SBA loans will often provide financing even though the request is not fully secured by collateral, something that conventional options typically don't provide.” They also typically require a smaller equity injection, which can help free up additional capital for use in other areas of the business.
Finally, SBA loans have a longer term and amortization schedule when used for functions such as working capital, equipment, business acquisition, and real estate, compared with conventional loans. “This makes for a potentially smaller payment and can help free up additional cash flow,” Pomplas points out.
3 Tips to Put Your Best Foot Forward
Securing a loan can require significant preparation and attention to detail, but there are ways to improve your chances of obtaining the funding you need to pursue your business goals.
- Choose a bank that specializes in small businesses. While many banks can provide a loan, one that has expertise in small business may be the best choice because they are more likely to provide personalized service and understand the unique challenges small businesses face. That means they can tailor their advice and lending solutions accordingly.
- Understand what the bank is looking for. Before granting a loan, a business banker will delve into your finances. According to Pomplas, they'll prioritize solid credit scores and payment history for the business and the owners, as well as profitability shown by steady or increasing revenues.
- Get your paperwork in order. A bank will want to see a plethora of documents to provide a picture of your company's current financial health and long-term financial projections.
“Entrepreneurs should be prepared with financials, especially personal financials for the owners,” Pomplas says. “We look for a personal financial statement detailing all personal assets and liabilities, and it needs to be as detailed as possible to demonstrate how liquid the owners are personally, which is something a credit report will not show.”
The bank will provide a list, but typically you should also be prepared to present your business plan, recent balance sheet, financial projections, personal and business tax returns, bank statements, and a client list, to name a few additional documents to have at the ready.
Pomplas says the paperwork aspect is often the hardest part for small business owners. “The form may appear to be overwhelming, but given its importance, owners should make sure to prepare the worksheet meticulously, then update it annually to make it less daunting.”
Are You Reaping the Benefits of Personalized Service?
Small business loans can offer a valuable solution for businesses looking to grow. As you navigate the complexities of seeking a business loan, it's crucial to have a trusted advisor by your side who can help you through the process, offer input on the best solutions, and serve as a strategic sounding board. In addition, a dedicated small business banker can help you access the products and services that can enhance your business' finances going forward.
Are you ready to build a relationship with a small business banker who can serve as an advisor, ally, and advocate? Find out more about First Horizon Bank's small business banking services today.
Next Article Learn More About Borrowing Options
1 Business.org. Entrepreneurs Are Risking Personal Finances to Start Businesses. Accessed May 2023.
