10 tips for getting a small business loan

Few businesses can survive without an extra line of credit or a loan at some point. If you’ve never secured a loan before, remember the first loan is usually the hardest to get. Bankers prefer to lend money to borrowers who have borrowed at least once and have paid back at least one loan on time. Banks are not venture capitalists who make high-risk loans. Banks prefer to lend to low-risk, low-profit ventures than to high-risk businesses or those with no business record at all. Banks cite risk factors and increasing costs of servicing small accounts as the primary reasons for minimizing their exposure to small businesses.

Still, it can be done.

Here are 10 ways to improve your chances of getting that essential bank loan:

  1. paper with YES circled in pencilFind a bank familiar with your industry. Banks need to make loans. That’s a primary reason they stay in business. To increase your chances of success, find a bank familiar with your industry and who has done business with companies like yours. Seek out banks active in small business financing. Some banks lend on a conventional basis (lending money without government support), while some banks participate in government programs (in the form of SBA loan guarantees and other loans).
  2. Brush up on loan terminology. Knowing what you’re asking for and the types of loans offered by banks can’t hurt.
    • Term loans. Banks provide $10,000 to $500,000 loans to purchase inventory, equipment and large ticket items. These loans can be unsecured (often with variable rates) or secured (often with fixed rates).
    • Commercial real estate mortgage. Secured by real estate, these loans are used to refinance, purchase or improve commercial or investment properties. Loan amounts can be anywhere from $25,000 to more than $500,000.
    • SBA-guaranteed loans. Don’t worry if you don’t qualify for a standard loan. SBA loans are designed for small businesses and guaranteed by the federal government.
    • Business lines of credit. Some banks offer business credit for overdraft protection, a line of credit that protects your business checking account up to a certain limit. Other banks may offer business credit cards.
    • Secured loans. Banks offer credit for a number of purposes, such as improving cash flow, refinancing debt or financing account receivables. Most secured loans are quick to get, and some banks provide fixed-rate financing for these loans. However, this type of loan is given mostly to established businesses with financial documentation for at least two years, more rarely to a startup.
    • Vehicle loans. If you are planning to buy a vehicle for your business, banks also offer vehicle loans up to 100 percent of the purchase price of a new or used auto, van or truck.

    Talk to your banker and let them explain the various loan products for small businesses. Assess which products are right for you, and which are more likely to be approved. Be aware that banks often require proof that you can repay the loan, including collateral requirements or assets deposited in that bank.

  3. Be prepared. Why is an entrepreneur like a Boy Scout? Both are prepared. An entrepreneur must be more prepared in a banker’s office than a Scout in the woods. You need to show your bankers that a loan is a low-risk proposition, so have on hand a completed loan application, copies of cash flow and financial statement projections covering at least three years plus a cover letter — the executive summary, if you will.
  4. Know your credit score. This is one of the first things a lender looks at when reviewing a loan application, so it’s important to know your score. FICO scores range from 300 to 850. It’s challenging for a business with a score of less than 600 to secure business credit from a financial institution.
  5. Anticipate the tough questions. Remember preparing for a job interview? The interviewer then never asked that question you were dreading. Instead, they asked something you had not prepared for in any way. Loan negotiations can be like that, too. Anticipate the truly tough, and some that aren’t so tough, questions to create the best impression. A confident and thoroughly prepared borrower is four times more likely to have a loan approved than a borrower who does not know the answer, one study says. To show how prepared you are, be able to address:
    • How much money do you need? Be as precise as possible. (Although adding a little extra for contingencies can’t hurt.)
    • For how long do you need it? Be prepared to go into detail about what the money will do and why your business is such a good risk.
    • What are you going to do for it? Businesses use loans for three things: to buy new assets, pay off old debts or pay for operating expenses.
    • When and how will you repay it? Your cash flow projections should provide a repayment time frame. Convince the banker of the long-term profitability of your business and your ability to repay the loan by using your financial projections and business plan.
    • What’s the collateral? Collateral is essential to business lending, so know what a collateral package would look like. Without collateral, a lender must rely solely on future performance or existing cash flow to repay the debt, which can translate to higher risk and higher interest rates.
    • How risky is this loan? There’s no business without risk. If you don’t discuss risk, the banker will assume you haven’t thought about the risks.
    • What will you do if you do not get the loan? Do not take an apologetic, angry or negative attitude. Screaming and shouting doesn’t work with children, so why should it work with a banker? Instead, present yourself as a mature, confident entrepreneur who can and will repay the loan. Provide the official with any promotional materials you might have, too, such as brochures, ads, articles or press releases.
  6. Dress professionally. This might seem like a no-brainer, but some entrepreneurs reason being their own boss means dressing as they wish. That’s fine for young high-tech execs who slouch around in flip-flops, ragged jeans and hoodies. It’s not so fine for a startup meeting with a banker. Project an image of an entrepreneur who is professional, sober and trustworthy, one who has the ability to repay the loan. This is a business transaction. Treat it as such.
  7. Don’t stretch the truth. Avoid broad, unsubstantiated statements. Any lender can easily check the facts on your application. If you can’t support your statements, don’t make them. Be able to support everything you say, including every single number in your projections. It’s best to keep projections, asset lists and collateral statements on the conservative side.
  8. Have all your documentation ready. Be sure all your documents are neat, legible and organized. Type all your loan documents. Handwritten documents look unprofessional. Don’t forget to include a cover letter. Your banker cannot make a decision until all the documentation is complete.
  9. Be confident. An attitude of confidence enhances your chance of getting the loan. Show that you can make a success out of the money that the bank will lend you. Visualize the positive results of the bank application, and tell them so.
  10.  Don’t quit! Rome, Microsoft and Boeing were not built in a day. If one lender turns you down (which is likely), keep trying until you get a loan. Ask for a referral from a successful entrepreneur; bankers, like everyone else, network extensively and are more likely to trust referrals from good customers. Find an associate, friend or acquaintance in good standing with the bank.

For a detailed loan checklist, environmental financing options, the nine “P’s” of successful technology commercialization, a microloan primer and an introduction to angel investors and venture capital firms, see our Grants, loans & capital section.