Getting a bank loan is a huge step in the right direction when starting or expanding your business. Nevertheless, it has become a lot tougher to get a bank loan approved in the midst of a tough economy. Therefore, it’s important to know the first steps in getting a bank loan and understand what banks are going to look for before you apply for one.
The three C’s
When looking at applicants for loans, bankers tend to look at the 3 C’s to determine if you’re a good candidate – Character, Credit and Collateral. Bankers want to be sure that you will pay the loan back, and that you won’t flee if the business doesn’t go as planned. There are a number of things that can help your case:
- Having a clean credit history
- Living in the community for a long time
- Owning enough collateral such as equipment, buildings and automobiles
Especially given the current economic climate, having high grades in all three of these attributes is vital to securing a bank loan for your business.
What are your chances?
It’s really tough to gauge your chances of getting a bank loan as most banks and bankers are vary in their requirements and opinions. That being said, there are some general rules that most bankers follow (as advised in BusinessTown):
- Getting a loan for a new business is tough
- Fixed assets such as machinery or buildings can almost always be financed
- Current assets such as inventory or goods in process increase your loan chances
- 2+ years of profitable operation greatly increases your loan chances
- The larger the owner’s investment in the business the better your chances of getting a loan
- Loans to small corporations will often have to be personally guaranteed by a shareholder
- It is difficult to get loans to offset operating losses
- It is usually possible to get a loan to modestly expand a profitable business
One thing that’s good to do is look at it through the eyes of the bank. What would you look for in an applicant? Generally the bankers want to know (taken from Dun & Bradstreet) –
- Exactly how this business will operate and why it’s expected to make money
- Exactly how the money will be used
- How you plan to repay the loan and over what time frame
- That you’re willing to take a significant financial risk in the business
- That you’re responsible and can manage this business
- Who else is involved in management or operations, and that they will also be responsible for the proper use of the money from the loan
One of the main things to keep in mind is that your own personal commitment, both professionally and financially, is taken into high consideration when applying for a loan.
Contacting a banker
Once you have all of your information in order, it’s finally time to contact a banker and work towards getting a loan for your business. During your initial phone call and setup, it’s important to:
- Find out the business loan rules for that particular bank
- Find out if they are looking for loans of your size and type
- Get a loan application
- Prepare all of your documents (including business plan)
- Schedule an appointment
- Prepare your presentation for the banker
Once you have completed all of these steps, the only thing left to do is to plead your case to the bank and hope that they agree that your business with be profitable.