Whether you’re starting a new business, running your small home based business or in the processing of growing an established one, you will likely be in need of cash at some point during the process. Although most people are familiar with personal loans and lending, many small business owners are new to the world of small business lending.
When it’s time to secure financing for your business, a bit of preparation could make the difference between approval and denial. Here’s a quick guide and some tips to getting a small business loan.
What Do the Banks Look For?
No two banks are the same and the specific criteria for any loan will differ from bank to bank. However, there are a few standard items that banks consistently look for when reviewing a small business loan application.
Nature of the business
The bank needs to have confidence in the viability of the business. The loan has to be used for legitimate business purposes. Obviously, if your company is involved in any questionable business (i.e. speculation, gambling, pyramid schemes), the bank will not consider your application simply on those grounds.
Your personal history
The bank will absolutely check you out and not just your credit history. They will look at your ability to run the business, your experience, your education. The bank will evaluate its own risk based on your personal credit.
The bank will be looking for collateral for the loan and also reviewing how much of your own money you have invested in the business. This proves to the bank that you have skin in the game and won’t be willing to just risk the bank’s money. This is also an indication of your ability to pay back the loan.
What Documents Will You Have to Provide?
There are a number of documents that you will have to provide when you apply for the loan. Different banks require different documentation, but you should expect to provide at least some if not all of the following:
• Personal and/or business credit history and reports
• Financial statements and forecasts for the business. You may also be asked to produce personal financial statements.
• Business plan
• Cash Flow Estimates
• Personal guarantees from all owners of the business, if applicable.
Providing this documentation in a timely and organized manner will be helpful. The bank’s decision won’t be based on the presentation of the documents, but you will gain some credibility with a polished, professional presentation.
How Do You Choose a Loan and a Lender?
Lending isn’t what it used to be. There is now a wide variety of loan products to choose from and just as many banks offering those products. Take your time to review your options when it comes to the institution and the product.
In general, it will be more difficult to secure a small business loan from a large banking institution. This is especially true for start-ups. With the right profile and credit history, you may be able to secure a loan from a big bank, but it won’t be easy.
Start your search with community banks or credit unions instead. It’s also helpful to start with a bank that you already have a relationship with, especially if it’s a good one.
Take the time to educate yourself about the loan options available before you even make contact with the bank. Understanding your options will help you to ask the right questions of the bank and make an educated decision.
How Do You Make the Pitch?
You’ve done all your homework and you’re ready to sit down with a loan officer. What are you going to say? You should be prepared to address a few basic questions before they are even asked.
Why do you need the money? Being able to articulate why you need the money and what the money will be used for is a critical step in this process. If you can’t pinpoint for the loan officer exactly what you need the money for, it will be difficult for him to have faith in your business plan.
How will you pay the money back? You will need to present a clear picture of your cash flow and your cash forecast for the bank. Having a plan to repay the debt before you even get approved will show the bank that you’re serious about repayment.
What if you can’t repay it? Similar to having a repayment plan, you should also have a backup plan. No one expects their business to fail and no one expects to fall on hard times, but it happens. Have a plan and be able to articulate it if asked.
Although you are trying to put your best foot forward to get the loan, you also need to be up front, honest and straight forward with the lender. A professional presentation and well-articulated answers to the questions will go a long way.
The Bottom Line
Small business loans aren’t easy to get, especially for start ups. But with some preparation, a clear business plan, and the ability to articulate the plan, a small business has a better chance of securing the financing it needs to continue to start or grow a business.