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10 Tips for Getting a Small Business Loan from Your Bank

May 22, 2017

As a small business owner there will come a time when you consider borrowing money from a bank or another lending institution. Despite what you may have heard, lenders are not eager to lend to small businesses. To be successful with your request, you need to know what a bank wants and how you should approach them.

You must present yourself as trustworthy and dependable, while also showing that you understand the principles of banking. Look at your proposal through the eyes of the bank to see where they are coming from. They have responsibilities to government regulators, depositors and even their communities. They are cautious as they are responsible for keeping their depositor’s money safe and regulators happy.

The following tips will help you prepare for that trip to the bank:

  1. Recognize that banks are different. They differ in types of financing available, interest rates charged, risk tolerance, services offered and their attitude toward small business lending. Find a bank that works with businesses like yours.
  2. Form a relationship with your bank. Most banks won’t provide loans to businesses that don’t have a checking or money market account at the institution. You should also have a relationship with your bank before you need a loan. Get to know loan officers early on and spend time building a background of information and goodwill.
  3. Start with small loans. As conservative lenders who want to minimize risk, bankers limit loans to people they know and trust. You can build this trust by taking out small loans, repaying them according to schedule and meeting all loan requirements in both letter and spirit.
  4. Know what information your banker needs and be prepared to share it. To get the funding needed, know what information a loan officer will ask for and provide the evidence required to ease normal banking concerns. Have answers ready for questions like:
    • What is the specific purpose of the loan?
    • Exactly how much money is required?
    • What is the exact source of repayment for the loan?
    • What evidence is available to substantiate the assumptions that the expected source of repayment is reliable?
    • What alternative source of repayment is available if management's plans fail?
    • What business or personal assets, or both, are available to collateralize the loan?
    • What evidence is available to substantiate the competence and ability of the management team?
  5. Do your homework. You won’t only have to be able to answer the questions above. You’ll need to answer even more probing questions from the loan officer. Unacceptable answers are damaging evidence that you don’t completely understand the business or are incapable of planning for your business’ needs.
  6. Write a business plan. Loan requests should be accompanied by a written business plan. It shows that you have examined, evaluated and planned for all aspects of your business. It also proves to the bank that you are doing the right activities.
  7. Have an executive summary. You put a lot of effort into you business plan, but you also need to summarize it in a two-page document. This will come in handy in case you’re asked by your loan officer to send “a quick write-up.”
  8. Prepare financial statements. You need to be able to account for your financial past. These statements can be generated internally, but most banks want to know that an independent accountant has verified the information.
  9. Understand your numbers. You can’t just present financial statements to the bank; you need to be able to demonstrate that you know how your business works and how your finances stand up to industry standards.
  10. Line up references. You’ll be asked for references by your loan officer. Be prepared to quickly provide names and numbers for a handful of your suppliers, customers, potential partners and even team members.

Asking a bank for a loan is stressful, but if you understand the process and prepare for it, you can minimize the stress. More importantly, you can optimize your odds of qualifying for the funding you are seeking.

You don’t have to do this alone. Having a solid relationship with an accountant can also help you obtain bank financing. We have relationships with top area banks and can help you find the right bank and then navigate you through the process. Contact us to learn more.

   

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