If you are among the 40% of baby boomers AARP says plan to work until they die, and if you plan to start or buy a business instead of working for someone else, your venture will likely involve some sort of financing. Unless you plan to fund this enterprise solely with savings—not recommended unless you are fabulously wealthy—you’ll need a business loan.
As any lender can tell you, the better prepared you are before making your request for business credit, the greater the likelihood of getting approved.
Part of this preparation is understanding what bankers will need to approve you. Banks make a major portion of their profits from loans. They’re not in the business of saying no; they just say it when your application doesn’t meet lending requirements, which are much stricter now than before the financial crisis. But be aware that start-ups are almost always considered risky bets, and many lenders are reluctant to finance them. Also know that many larger banks won’t even consider small loans, which are less profitable than larger loans but require the same amount of time to analyze and administer. Don’t let these discourage you. Get organized.
How small is small? According to the Small Business Administration (SBA), the median small business loan from a financial institution is roughly $135,000, with highest around $250,000. SBA loans, which are not underwritten by the US Government but by SBA partners (lenders, community development organizations and microlending institutions), range from $5,000 (a microloan) to $5 million, with the average around $371,000.
Do Your Homework
So what exactly are lenders looking for? Basically, they’re searching for clues that your business will be able to repay the loan, plus interest, with metronomic regularity. Most financial institutions will expect the loan to be fully secured, either with business assets or personal collateral. Having some skin in the game, meaning you have your own equity invested in the business, strongly works in your favor.
Lenders also will be looking at opportunities to profit from your success, so as your business grows, so will your business relationship. The buzzword in banking circles these days is cross-selling, so your business loan provider may also seek to be the issuer of your business’s credit cards and holder of your treasury accounts.
Lenders will also be looking at you—your personal finance record, your credit score, your assets, your work experience, and your character. If you’re starting a business for the first time, having partners with the experience and track record that you lack may also be a requirement.
The Questions You Need to Answer
Once you’re ready to make your request, ask the financial institution for the documentation it requires. Then, be prepared to answer the questions, in depth, for each of the categories listed below.
What will the funds be used for? (Note that banks won’t lend for speculating, passive investments, pyramid sales or gambling.)
How much money do you want to borrow? Why that particular amount?
Term and Repayment Plan
For how long will you need the money and what is your specific plan for repayment?
What assets, business or personal, do you intend to use as collateral? What is their market value? What portion of their value can you use as collateral?
Asset and Liability Statement
Your current, complete business asset and liability financial statements (your balance sheet).
Current Income and Financial Performance Statement
Your current, complete business statement of income and expenses (your profit and loss statement, or P&L).
Business Plan Details
Your written plan for your business including goals and action steps, timetable, resource allocation, funding required, and related financial data. You may be asked for cash flow projections for at least a year.
Historic Financial Performance Information
Past business financial performance information under your ownership or under the previous owner’s ownership.
Other Information As Required
Information about you (your C.V., your loan Guarantor—someone who will pledge his/her assets and financials to guarantee repayment of the loan should you default. Guarantors can be a legitimate tipping point factor in getting a “yes” to the credit request.
If You’re Turned Down
What do you do if you get a no? Don’t give up. Pursue the reasons for the rejection. Was it a procedural thing—a missing piece of information on the application—or something else? Then ask what would it take to get a yes. You can then either alter your request accordingly and resubmit it, or take it elsewhere.
If you keep hitting a brick wall, consider alternative sources of funding. Many entrepreneurs seek out financing from family and friends. Some use their available credit from credit cards or home equity lines of credit to finance their businesses. If your “no” comes from a commercial bank, consider community banks and credit unions, many of which specialize in small business loans. You may also want to look into alternative sources of business credit, like Kabbage.com, which offers cash “advances” of between $500 and $50,000 to businesses that already have a performance record, such as online sales. If you do decide to go online to fund your business, be sure you understand all of the terms and conditions of the financing, as they can differ from conventional small business loans.