There’s an expression that says, “Don’t put the cart before the horse.” This means that you should complete tasks in the right order when working toward a larger goal – and if your goal is to secure financing for a new entrepreneurial venture, those steps when starting a business are essential for getting a small business loan.
In this overview, you’ll learn the seven essential steps when starting a business that you should check off your to-do list before you apply for funding. You’ll also find several resources to support your journey to small business ownership.
1. Create a business plan and financial projections
When starting a business, it’s important to craft a detailed business plan and financial projections. Although not all new businesses will need each of these areas defined, you should research your business’s goals, the goods or services you’ll offer and why they are needed, your operational structure, target market, competitors, staffing needs, marketing strategy, and more. The results of your research should be discussed in your business plan.
Gaining clarity in these areas will help you use your time and financial resources to best support a strong launch and early growth.
The other key document that you need to create is a three-year financial projection:
- Income: For new businesses, you won’t have business income, so you’ll need to provide your best estimate based on your pricing strategy and sales volume. The more you can include in your business plan about why you believe your numbers are on target, the more realistic your projections will be when reviewed by a potential lender.
- Expenses: You should know the current cost of producing your goods or services. You should also ensure that you can offer these goods or services at a competitive market price with room for profitability after your expenses are considered. You should also have a solid estimate of anything you need to run your business, from staffing costs to marketing, as well as any startup costs.
Working through these projections is essential to ensuring that your product or service can ultimately be sold and profitably produced.
Resources to help
While you can find a lot of information online that can help you develop a business plan, one of the best strategies is to meet with representatives from your local Small Business Development Center (SBDC) and SCORE. Both of these organizations offer a range of free services to support your launch and growth – and all are available for free or very low cost.
- SBDC: SBDCs are organized through the U.S. Small Business Administration (SBA). They provide counseling and training to small businesses in all stages, from pre-launch guidance through expansion. They have individualized business technical assistance, including business planning and financial projections, as well as guide you to suitable lenders. You can find one near you through the SBDC Finder.
- SCORE: SCORE is a national network of small business experts who volunteer their time to mentor small business owners. They offer small business planning and business plan development, financial management guidance, marketing assistance, and more. SCORE has local offices around the U.S. and offers a range of online trainings, webinars, and more.
2. Formalize your business
Registering your business is one of the first steps to creating a viable and legally compliant enterprise. It’s also an important step to complete before you apply for funding. Small business registration can also offer advantages:
- Liability protection: Certain legal structures can give you personal liability protection, such as Limited Liability Corporations (LLCs) and corporations. This means that your personal assets are protected if your business faces debt or legal issues. Registering your business also allows you to purchase business insurance with additional liability protection if your business is sued.
- Tax advantages: With small business registration, you can benefit from tax deductions and other advantages to lower your taxable income.
- Legal compliance: Operating as a business without legally registering as a business can open you up to significant penalties and even legal consequences.
If a lender provides financing for your business, the loan must be in your business’s name. Even if you’re a sole proprietor, the loan would most likely be given to an entity with the formal title: “Name, Individually and DBA Name of Business.”
Resources to help
It’s a good idea to formally establish the business as you work on your business plan and projections. An SBDC counselor can help you understand the differences between the types of business entities you can choose, such as a sole proprietor, LLC, S-Corp, or C-Corp.
It’s also a good idea to speak with an accountant or attorney who specializes in small businesses. However, it’s also important to know that you can change your business structure at any time. For that reason, most businesses launch as sole proprietors or simple partnerships because they’re both the quickest, easiest, and least expensive route to launching a business.
This guide on small business registration will give you an overview of the different types of business entities you can choose and tips to support you during the business registration process.
3. Request an Employee Identification Number (EIN) from the IRS
This step is quick, free, and easy. An EIN provides you with an identification number that you use instead of a Social Security number for your business. It’s required for most businesses, including if you have or plan to hire employees. In addition, it gives you additional protection from fraud or identity theft.
4. Complete a formal operating agreement
If you have more than one owner for your business, you’ll need to hire a lawyer to complete the ownership documents, like the bylaws or a business operating agreement. Many operating licenses also require specialized legal assistance, like liquor licenses.
5. Open separate business bank accounts from your personal accounts
Separating your business and personal finances ensures your financial clarity and legal protection. It also simplifies your accounting, protects your personal assets, and improves your business credit. In addition, if you’re approved for a small business loan, the funds must be deposited into a business bank account.
In fact, the IRS requires that many business entities, such as LLCs and corporations, maintain separate business and personal accounts. Even if your business is a sole proprietorship, keeping your finances separate makes it easier to do your taxes correctly and to clarify anything if you’re audited.
6. Be sure your personal tax filings are up to date
Most small business lenders, including banks, credit unions, and Community Development Financial Institutions (CDFIs), require tax returns before approving small business loans. As a new business, your personal tax returns will be used in place of business tax returns (since you won’t have those yet).
7. Review your personal credit history
When a lender reviews your loan application, there are many factors that will determine whether you can take on loan payments, like your personal credit history and score. Every lender has different credit score requirements, but it’s always a good idea to do what you can to increase your score before you apply – here’s how to do that.
In a few minutes, you can review your history and find any errors or incomplete information (such as past debt that has been paid off). Then, before you apply for a small business loan, you can address any issues you find and have the information corrected.
Pursuit can help your new business thrive
Once you’ve undertaken these seven steps when starting a small business, you’re ready to meet with lenders to discuss your plans. And when you’re ready to explore financing options that can help you launch and grow, Pursuit can help.
With options from $10,000 to $5.5 million, Pursuit has financing for working capital, the purchase or construction of commercial real estate, refinance business debt, and more for businesses in New York, New Jersey, Pennsylvania, Connecticut, Nevada, Illinois, and Washington. Pursuit also offers a wide range of resources online, including informational articles and webinars, that are available for free, and you can access them at any time.
Get pre-qualified in minutes when you work with Pursuit.
