You’ve moved your startup from a dream on paper to an office. Now you need money to pay suppliers, market your products or services, and pay the staff. Alternatively, perhaps you are an established business ready to expand with new equipment or into new locations.
It might be time for a business loan. Traditional loan sources are from a national commercial bank, a local bank, or SBA loans. Some credit unions also serve the business market. There are also other alternative sources for loans, including crowdfunding and peer funding sites.
The key to getting the business loan that you want at a rate you can afford, especially a bank loan, is preparation.
Reasons for getting a loan
Multinational corporations, mid-size manufacturers, and small service providers all routinely apply for bank loans. Every company in business needs working capital.
The most common reasons for applying for a business loan include:
- Buy real estate.
- Get more building space.
- Buy equipment.
- Invest in inventory.
- Get needed working capital to tide a business over a money crunch.
- Launching of a new product.
What You’ll Need
Bank loans typically require extensive paperwork. Check with your accountant to make sure all your business financial reports are ready for the loan officer’s review.
At the least, a small business applying for a loan will likely need:
- Your personal credit history and credit score.
- The credit history for your business.
- Both personal and business financial statements. This includes your debt-to-income ratio.
- Business plan, which includes biographies of the principals, their education and experience in the field. Provide information such as how long you’ve been in business and the current state of the industry and growth rate.
- Projections for cash flow for the coming year.
- Guarantees from the principals.
- Industry risk as rated by governmental SIC codes.
You should accompany these documents with the story of your business, as a way to tie it all together, and present your best possible profile to the loan officer. Talk about industry growth, your chance to partner with a major player in the field, or other reasons you are seeking the loan.
The loan application package, which will also include all the required paperwork, should be filled out. If you have questions, ask the loan officer. Don’t turn it in only partially completed.
What Lenders are Looking For
The old saying that banks are more likely to lend to you when you don’t need the money is often true for businesses. Your firm needs to be on solid financial ground in order to qualify for a bank loan. In a best case scenario, that means you should be able to show your business has been profitable for the last three years.
Primarily, there are three criteria you need to meet.
- The purpose of the loan must be financially sound. That means using it for speculating, for lending, for investments that are passive in nature, for gambling, or for pyramid sales are out of bounds.
- Have a good credit history. The principles, including you and the key members of your management team, must have good credit, personal or business, and be experienced in the field.
- Proof you can pay the loan back. Your business or you personally must have the assets to back the loan up. In many cases, you will be asked to guarantee the loan personally. As long as your firm has ample assets, they probably won’t ask for a lien on your home.
The loan department will examine all the paperwork in detail. Don’t be surprised if they even check your social media for clues about the state of your business. Bank loan departments are thorough.
In summary, do your research, prepare well in advance of the loan, and completely fill out all the paperwork. Present your business in the best possible way, while staying accurate. The loans are available, and if you prepare adequately, you have an excellent chance of getting what you need.