Securing funding is one of the most difficult tasks a small business owner will face, and the current economic situation has only made this process more difficult. While the current notion is that securing a business loan is nearly impossible, the truth is that there are still bank loans available for those who do the necessary footwork and come prepared. Here are five steps to prepare you for that process.
1. Find banks suited for your business size and industry. One common misconception is that all banks are the same when it comes to getting a loan. Some banks specialize in loans for smaller and younger businesses, while others prefer to lend to established firms. Larger banks will have a more formulaic method when reviewing loan applications, while community banks will scrutinize each application on a case by case basis. Banks that were heavily involved in credit default swaps may still be recovering capital and will have less to provide. One easy way to assess a bank’s capacity to loan is to check its Texas score, which measures how much credit troubles a bank is facing. “If a bank has a score of more than 150 percent, they might already be suspending most lending activities,” says Charles H. Green, Executive Director of the Small Business Finance Institute.
2. Start creating a relationship with the bank before you need a loan. A bank will be much more receptive to your loan request if they know you before the transaction, just as you would be more likely lend money to a friend instead of a stranger. After you find a bank that suites your business, open an account with them and use this account to demonstrate your dependability. Get to know your banker and help him or her understand your business. Then when you need a loan, your relationship will provide a foundation.
3. Embrace risk. Don’t be afraid to discuss risk with your bank. Every business has risk, and if you do not talk about it, the bank will assume that you have not taken it into account. You also should discuss how you will manage success. Accounting for both good and bad eventualities in your loan application shows that you have the ability to make realistic forecasts and projections.
4. Anticipate questions your banker might ask. Having strong, well-thought-out responses to questions demonstrates that you have done your homework and have a thorough understanding of your financial situation. Here are some examples of basic questions you should prepare answers to, prior to visiting with the loan officer: How much money do you need? What are you going to do with the money? When will you repay the small business loan? What will you do if you don’t get the small business loan?
5. Be prepared to apply to multiple banks. If at first you don’t succeed, try, try again. No matter how much you prepare, sometimes things will not go your way. It is not uncommon for businesses to apply to multiple banks before they get approved for a loan. Especially in today’s economy, persistence and perseverance are needed to successfully secure a bank loan.
While all of these tips listed above are important, they all convey the same message – banks value firms that do their homework. Banks want to see you take the loan review process seriously, and taking extra steps with your loan application shows that you are trustworthy. Being prepared is the best way to assure your bank that no matter what contingency arises, you have planned accordingly and will still be able to pay the loan.
Tim Armstrong is Market Research Coordinator for Sageworks, a leading provider of private industry data, financial analysis, and risk management software for accounting firms and financial institutions. Tim is in charge of conducting research for Sageworks’ developing markets. Tim works directly with the marketing and product development teams in his role.