Perhaps you have been turned down for a business loan. Or perhaps you are worried that you might be turned down if you apply today.
Instead of worrying, here are three steps you can take to improve the chances of the bank saying “yes” to your next business loan application.
1. Know what is on your business credit report: Most of us know our personal credit score, but many business owners are not aware that they have a business credit file – let alone what is in that report.
The agencies that maintain business credit reports are Experian Commercial, Equifax Small Business, and Dun & Bradstreet (D&B). To see if your company is listed, do a free search on the respective websites.
However, unlike your personal credit report that is available once a year at no charge, you will have to pay for access to your business credit information. The cost is worthwhile if you find and change incorrect information that is hurting your company’s ability to operate properly, such as getting a bank loan.
A business credit score ranges from zero to 100 based on factors such as how long you have been in business and how much debt your company is carrying. The single best way to raise your business credit score: make all payments to creditors on time.
Be aware that many small-business lenders will consider your personal credit when extending terms to your business. So work closely with your bank, your vendors, and the credit agencies to be sure that both your business and your personal credit reports accurately reflect your credit history and therefore your creditworthiness.
2. Apply to the right bank for the right loan: Not all banks are the same -- they have different philosophies about lending. For example, some banks prefer to make loans that are secured by assets like real estate, while others lean toward giving loans to companies that have strong cash flow.
Similarly, certain banks specialize in loans to certain industries. For example, larger banks tend to do business with larger companies, while smaller community banks typically prefer lending to smaller, owner-occupied businesses such as hotels, convenience stores, and professionals like dentists and veterinarians.
As you research the lender that is most appropriate for your type of business, remember to consider credit unions. They are not-for-profit associations that extend attractive rates, fees, and services to their members, including fixed rate loans that many banks don’t currently offer.
Credit unions typically consist of people who share a common bond – such as the same employer, church, occupation, or community of residence. Becoming a member is usually as easy as opening a small deposit account.
After you research the lender that is most appropriate for your type of business, be sure to investigate the kind of business loan that best meets your needs.
There are two categories of small business loans – conventional and government-insured. Conventional loans are often not as attractive because they have certain requirements and restrictions that can be difficult for many smaller firms to fulfill, such as maintain minimum working capital or minimum cash reserves, and pledging deposit accounts or life insurance policies as collateral.
By contrast, government-insured loans provide more flexibility – such as the Small Business Administration (SBA) 504 and 7(a) loans, and the U.S. Department of Agriculture Business & Industry loans. For many owners, that’s a pleasant surprise because the common myths associated with these loans include:
• They take a long time
• They charge high fees
• They require a lot of paperwork
• They have high interest rates
• They are for start-up companies or people with bad credit
The reality is that SBA and USDA loans can offer fast, easy, and economical solutions for many small business owners.
3. Cultivate a relationship with the right banker: The application process actually starts long before you walk into the bank and complete any paperwork. For example, you should have a business plan that explains how you intend to spend the money you want to borrow and how you will pay it back.
Also, be sure to meet face-to-face with your potential lending officer at least twice a year -- and preferably once per quarter. Bankers do not like surprises about your financial situation, so always be completely candid with your banker.
When bankers know you and trust you, they are more likely to do business with you, especially to overcome any problem areas of your loan application. It makes sense: you do not want the first word that your banker hears from you to be “Help!”
Banks want to lend to well-prepared, informed business owners. By following the easy 1-2-3 steps above, you can be one of these savvy and sought-after customers.
Navin Shah is Chairman of Royal Hotel Investments, which owns and operates two hotels in Covington and one in Conyers. He is also Vice Chairman of Embassy National Bank, a community bank in Lawrenceville that he helped establish in 2007 and has become one of the leading SBA “Preferred Lenders” in the southeast. He can be reached by e-mail at 1kingshah@gmail.com
