As the Director of an SBA Microloan Program, I get a number of microloan requests from software developers looking for a small loan to build their software application. This is not an easy type of loan to fund. Traditionally, software startups secure funding from investors or friends and family, but it is possible to secure a loan for a software startup. So today I wanted to provide 3 tips on how to secure a small loan for software development.
1. Have a Backup Plan – I think the most important factor in your loan application is a section where you outline your backup plan. Providing a loan to help fund software development is incredibly risky. What if you spend all of the loan money, build the software product and find out that your potential customers are not willing to pay for the product? Since you have no proven sales, you are going to need to demonstrate a backup plan to the lenders.
If you are a software developer in 2012, I am sure you are able to find work. You may have a day job now, or work on a project by project basis as a freelance developer, but ultimately you should be able to find work if your startup fails. If you can prove that you have generated enough personal income in the past to make the loan payments, and show that you are willing to go back to a day job if the business fails, you should be able to put the lender at ease.
2. Prove the Market – You need to prove, as best you can, that there is a market for your product. There are a number of ways to do this:
- Competitors are Profitable – Maybe the software you are developing is a direct competitor to a company who is already profitable.
- Google Adwords Keyword Tool – You can use the Google Adwords Keyword Tool to find out how many people are searching for keyword phrases related to your product. For example, the ProjectionHub software helps entrepreneurs create financial projections, and we know that each month there are approximately 15,000 searches on Google alone for the keyword phrase “Financial Projections”
- List of Interested Customers – Maybe you set up a 1 page website with a form for potential customers to fill out if they are interested in your software when it launches. If you are able to generate significant interest from your pre-launch page, then there is probably a market.
3. Pre-sales – You might be able to talk to potential customers and actually have them sign a letter of intent that states they plan to purchase access to your software once it is completed. These letters will immediately prove the market to the lender, and help them run some preliminary numbers to determine whether or not you will be able to pay back the loan based on those projected sales.
Getting a loan for a software startup is not easy, but it is possible if you position yourself the right way.
You can get started with your loan application today by creating a set of financial projections for free using ProjectionHub. Good luck!