I. Introduction
Unless a new business owner is a millionaire or has an angel investor, a small business loan is almost always a necessity to get the business off the ground. The amount of labor that goes into starting a small business is a feat in and of itself. However, without the financial backing of a small business loan issued from a bank, all other efforts at starting the business may be fruitless. This article will discuss how to obtain a small business loan from a bank by discussing the preparation that goes into receiving a small business loan from a bank and discussing how to manage debt.
II. Loan Meeting
Before receiving a small business loan from a bank, the new business hopeful will have to present his or her case to a lending officer from the bank. [1] While the presentation to the lender may be a determining factor in whether or not the business owner will get a loan, the preparation that goes into the presentation is key. [2] The lender will look at many different factors including “your personal financial history and credit rating, your history with a particular bank, the purpose of your loan request, your experience in managing a business, particularly the business for which you need financing, your personal investment and commitment to the business, how you intend to repay the loan, and your preparedness and ability to convince the lender that you are a good credit risk.” [3] A lender will look towards a positive combination of these factors in determining whether to lend money. [4]
A. Personal Credit History
Many potential small business owners do not realize how much weight personal credit history carries. [5] A good credit history shows the bank that the potential lendee is responsible and will be able to successfully get a new business off of the ground. [6] While getting a loan in the midst of the current economic crisis may seem impossible, it simply takes more work on the part of the potential lendee. [7] “In the wake of all these corporate bankruptcies, banks are carefully reviewing all lending practices and trying to mitigate the risks. Before you go into a financial institution for a loan, know your credit history.” [8] Additionally, if an individual has a positive history with the lending bank, he or she may have a better chance of getting the loan application approved. [9]
B. Documentation
The purpose of a request for a loan must be communicated to the lender in a manner that is both professional and comprehensive. [10] “Be prepared to have several key documents on hand before you even set foot in a bank. These should include personal financial statements, tax returns, monthly cash flow projections, and a well-prepared business plan. Established businesses should also produce references from suppliers and customers.” [11] Additionally, while enthusiasm goes a long way towards showing commitment to opening a new business, potential lendees should be careful not to exaggerate facts in writing or during the meeting because the bank can easily check for errors. [12] Errors in reporting will greatly diminish an applicant’s credibility. [13]
C. The Business Plan
It is often helpful to combine the above documentation into a single portfolio called a “business plan.” [14] “Having gone through the exercise of documenting the business plan will leave you much better prepared to explain your business, how you intend to manage it, what your projected income and expenses will be, how soon you expect to start generating a profit, what your cash flow will look like, and finally, how you intend to repay the loan.” [15]
III. Managing Debt
A key issue when taking out any kind of loan revolves around what would be considered acceptable terms. [16] Often such a decision whittles down to the personal choice of the individual taking out the loan. [17] “It is important to think carefully about the amount you are requesting, and over what term you want to repay the loan. It may be tempting to extend the loan over a longer term and thereby reduce your monthly payments, but you will be paying a lot more interest over the long run, thus cutting into your business profits and reducing your return on equity . . . You should not overburden your business with debt.” [18] However, new business owners must remember that it is important to make sure to take out sufficient financing for the new business from the onset of the loan. [19] If the original loan falls short, the owner will be forced to take out a second loan. [20]
Interest rates are often a source of confusion among new business owners. [21] Often, the lowest interest rate does not equate with the best loan terms. [22] “Trade- offs,” or “giving up one thing in return for another” must be considered before picking the best loan. “The most normal application is when a lower interest rate is given up in return for more favorable terms such as a longer business loan.” [23] It may be helpful to seek the advice of a business loan advisor when making such a decision. [24] It is also important to shop around for the best loan terms. [25] Some banks specialize in lending to certain types of businesses and may therefore offer better terms and conditions depending on the business. [26]
Once the terms of the loan have been agreed upon, the bank will require the lendee to sign numerous documents, including a loan agreement, promissory note, and a guarantee and surety agreement. [27]
IV. Conclusion
While obtaining a small business bank loan in this economy might not be the easies feat, it is still possible. With the appropriate planning before requesting a bank loan and a proper understanding of how to manage debt, starting a new business is completely feasible.
[1] How to Request a Bank Loan, http://www.googobits.com/articles/389-how-to-request-a-bank-loan-for-your-small-business.html (May 31, 2005).
[2] Id.
[3] Id.
[4] Id.
[5] Recipe for Small Business Loan Success, STARTUP NATION, http://www.startupnation.com/articles/911/1/AT_Recipe-Success-Bank-Loans.asp (last visited Mar. 8, 2009).
[6] Darrell Zahorsky, Small Business Information: Getting a Bank Loan or Credit, ABOUT.COM, http://sbinformation.about.com/cs/bestpractices/a/aa083102a.htm (last visited Mar. 8, 2009).
[7] Id.
[8] Id.
[9] Recipe for Small Business Loan Success, supra note 5; AllBusiness: Build Your Business Credit, http://www.allbusiness.com/banking-finance/banking-lending-credit-services/11470021-1.html (last visited Mar. 9, 2009).
[10] Yahoo!Small Business: Qualifying for a Small Business Loan, http://smallbusiness.yahoo.com/r-article-a-2250-m-2-sc-54-qualifying_for_a_small_business_bank_loan-i (last visited Mar. 8, 2008).
[11] Id.
[12] Isabel M. Isidro, Twelve Tips for Getting Your Bank Loan Approved, POWER HOMEBIZ, http://www.powerhomebiz.com/vol12/bankloan.htm (last visited Mar. 8, 2009).
[13] Id.
[14] How to Request a Bank Loan, supra note 1.
[15] Id.
[16] Id.
[17] Id.
[18] Id.
[19] Id.
[20] How to Request a Bank Loan, supra note 1.
[21] Small Business Bank Loan, http://www.dart-creations.com/article-tree/busi/small-business-bank-loan.html (last visited Mar. 8, 2009).
[22] Id.
[23] Id.
[24] Id.
[25] The Secrets of Getting a Business Bank Loan, BYTESTART, Aug. 21, 2007, http://www.bytestart.co.uk/content/finance/funding/business-bank-loan.shtml.
[26] Id.
[27] Lectric Law Library, http://www.lectlaw.com/filesh/fs01bnk.htm, http://www.lectlaw.com/filesh/fs01bnk.htm (last visited Mar. 8, 2009).