Every business needs money to operate. Whether your business is just starting out or well-established, financing is an ongoing concern. Small business, especially, need to secure financing in order to run smoothly and achieve both stability and business objectives. Unfortunately, many promising entrepreneurs don’t know how to go about getting a business loan, a process that can be daunting for even experienced entrepreneurs.
Read on to find out what you need to do in order to secure a loan for your business.
Identify Bank Criteria for Loans
Banks and lending institutions have certain standards, guidelines, or criteria that they use to assess and vet applications for small business loans. Many banks require that the applicant prove one or more of the following:
- The loan must be used for a legal and viable business goal.
- The business must be eligible according to size, nature, and use of proceeds from the loan. For instance, most lenders prohibit the use of loans for pyramid schemes, speculating, and passive investments, among other strategies.
- The business’s partner(s) must prove their good character, experience, and personal and/or business credit history.
- The business must have a plan to pay back the loan or reasonable collateral, including personal and business assets. Small business loans from the Small Business Association must be fully secured. Owners of the business must be willing to use their personal equity in the business.
Identify Required Information
According to the lender, certain documents must be provided. These may include:
- Your personal and business credit report/history.
- Financial statements for both personal and business accounts, including existing and/or startup businesses.
- Projected financial statements for the business.
- A comprehensive business plan, including relevant personal information about the owners.
- At least a year’s worth of cash-flow projections.
- Guaranties from all of the business’s principal owners.
Easing the Application Process
You can make the application process for a business loan as easy as possible by preparing all the relevant information and documents ahead of time. You should be honest and thorough when it comes to what you share.
Before you apply for a loan, you should gather and organize information about loans and lenders. You’ll want to be prepared to ask pertinent questions when it’s time for your first appointment. In addition, you’ll want to spend some time looking into the lending institution. Remember that larger banks are less likely to offer small loans, which are significantly less profitable but require the same amount of administrative and underwriting input. Make a list of lending institutions you would like to approach based on your experiences as a customer, but don’t forget to explore other options, including community or local banks and Credit Unions.
A lending officer can help you to understand what documentation you will need to provide. You should provide everything that the lending institution asks for. Remember that if you don’t, your application may be denied or put on hold as a result.
How Much Should You Expect?
Business loans vary according to the nature of the business, the number of employees, and the business’s financial needs. For small businesses, the median loan ranges from $130-140K, with an upper limit around $250K. The SBA provides everything from “microloans” for small business owners ($5,000) to loans of $5 million.