Bank Loans for Small Businesses
What banks look for when considering a loan for small businesses
Traditionally, banks are more conservative with their investment dollars.
Unlike many venture capitalists or angel investors, they are far more likely to
approve a loan for an established business over a start-up or emerging company.
This is largely due to the fact that they are investing the money of their
depositors.
However, thanks to government agencies such as the SBA (mentioned above),
which work with many banks, small business owners can get business loans from
banks with a strong business plan and well prepared business loan request. And,
banks are more likely to give modest sized loans, whereas venture capitalists
are looking for much larger deals.
First and foremost, prior to approaching a bank, you should have all of your
key documents in order, starting with a solid business plan. You will also need
to have the most recent financial statements available, projections for the
business (this is typically in the business plan) and a repayment plan, plus
collateral.
Collateral may include:
- Hard goods such as equipment
- Real estate
- Stocks or bonds
- Other personal assets
- Personal guarantees
Banks also want to know that you are making your own investment in the
business. A bank is more likely to approve a loan if (pending a solid business
plan) they see that the owners are investing a good percentage of the necessary
start-up capital into the business.
In order to maximize your chances of receiving approval on a business loan
from a bank, it is wise to look at the situation from the standpoint of the
lender. A lender wants to know:
- Exactly how this business will operate and why it is anticipated that it will make money
- Exactly how the money will be used
- How you plan to repay the loan and over what time frame
- That you are willing to take a significant financial risk in the business
- That you are responsible and can manage this business
- Who
else is involved in management or operations and that they will also be
responsible for the proper use of the money from the loan
The smaller the business, the more closely the individual behind it will be
evaluated. Most small businesses, in the forms of sole proprietorships or
partnerships, are closely tied to the experience, know-how and overall
character of the owner(s). Therefore, you need to make sure that you get your own
financial records in order before asking for a bank (or any lender) for money
to start a business. A solid personal credit rating is also very important
since the small business is typically an extension of the individual starting
it.