Most small business owners will require a business loan at some point. Your application can go more smoothly, quickly, and favorably if you prepare in advance. Let’s look at some specific tips.
There are two categories of loan questions – those you should ask yourself and those you should ask your banker.
Start by being honest with yourself with answers to such questions as:
- How much money do you need and why do you need it? “Why” might include reasons such as business start-up; seasonal up’s and down’s in sales; a game-changing opportunity; or unexpected costs due to weather, equipment malfunction, or another emergency. Be careful of over-expanding, which is a major cause of business failure.
- How fast do you need the money?
- How much time do you need to pay back the loan?
- What collateral do you have available to pledge against the loan? Be willing to offer your house as collateral, even if you don’t have much equity, because it gives you credibility with your lender as being a serious borrower. Other collateral to consider is land or buildings you own.
- What is the status of your business? For example, are you a new business or an established firm? Is your cash flow strong or weak? Are your profits amazing or disappointing?
Next, schedule a meeting at the bank you currently do business – it’s always best to start with the people who already know you. Your goal should be to determine your best options, including how much loan you can actually afford, with questions such as:
- How much lending does the bank do to small businesses? Big banks typically focus on bigger companies and bigger loans, which is why they deny up to 80% of small business loan applications, according to a recent survey.
In contrast, community banks provide about 60% of all small business loans between $100,000 and $1 million. Community banks are themselves locally-owned small businesses, so they understand the special circumstances and needs of entrepreneurs like you – including the need to keep your loan application moving quickly and conveniently.
What types of loans does the lender offer to meet your needs? Options might include:
- Small business line of credit – you pay a fee for setting up this service, but you don’t get charged interest until you draw the funds
- Accounts receivable financing – you get funds immediately based on your accounts receivable, then pay the loan as your customers pay you
- Working capital loans – this type of loan is usually short-term (30 days to one year) and is used to finance daily operations, such as seasonal fluctuations
- Equipment loans – typically, this type of loan requires a down payment of 20% and is used to buy equipment, vehicles, or software, with the purchased items securing the loan
- SBA loans – the interest rate and repayment terms are usually more favorable for these types of loans, and if a bank is a “preferred SBA lender” your application procedure will usually be easier and approval time will be shorter
To identify the right loan for you, consider such key factors as:
- Interest rate – is it fixed or does it vary over time
- How often is the interest payable – weekly, monthly, other
- When is the principle due and how it is amortized over the life of the loan – always ask for the longest term possible because payments are lower and you can pay more principal whenever you have extra cash available
- The loan origination fee and any other administrative, processing, or underwriting fees
- Any restrictions or operating covenants imposed on your business
- Circumstances that might cause you to be “in default”
- Prepayment – if you pay off the loan early, is it with or without penalty
Your objective with a loan application is to convince the lender that you will pay back the money – that you are a worthy credit risk. An important way to convey this is with records that are organized, complete, and up-to-date. Confirm the precise information your lender will need, but typically you should have the following ready and available:
- Financial statements and accounting records for the past two to three years, as well as year-to-date financials – notably balance sheet; income and loss statements; cash flow statements; and shareholder equity
- Projected financial statements – to prepare these “pro forma” statements, you may want to consult with your accountant so you are realistic, without over-estimating either income or expenses
- Tax returns for the past two to three years, including all attachments
- Legal structure, federal tax identification number, and list of executive officers with their backgrounds – consider incorporating your business, if you haven’t already done it, so you can benefit both financially and legally
- State filings such as certificate of incorporation and good standing certificates
- Insurance policies, notably general liability and key man
- Business credit report or personal credit report and score
- Outstanding loans
- Business assets, as well as potential collateral for the loan
- Business plan, executive summary, or “investor pitch deck” for the company
- A large number of returned or “bounced” checks
- Little or no collateral available
- Low profits or limited cash flow
- Unorganized records
“Whether you realize it or not, asking for a loan can be a little like asking someone out on a date.” That’s what reporter Geoff Williams wrote recently on USNews.com and he’s right.
Lenders want to consider you a good financial catch, so be confident without being arrogant. Meet with your banker in person every six months to provide an update about your business. You will become a customer that the bank knows and values, which is especially important when you need quick, positive help with a loan.
For small business owners, finding financing is always a challenge – but these suggestions can help make your next business loan easy, fast, and affordable.
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 lenders in the southeast.