Small business owners know that the business loan process can be stressful. Whether you’re applying for a business startup loan or business expansion loan, there is a lot of paperwork and documentation involved to get approval. In business, time is money, so you want to get things done as fast.
Still, it can be done.
Here are ten ways to improve your chances to help you do just that.
Use your network. To get business loan advice, business owners should start by asking business owners they know. Find out which banks are business-friendly and which ones to stay away from. Your network may also be able to provide a warm introduction to a commercial lender, which will help.
Bankers network extensively and are more likely to trust referrals from good customers.
Find a bank familiar with your industry. Banks specializing in business loans have a better understanding of the business challenges you face. These banks typically offer business loan advice and package their products
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).
Know your business. The better you understand the business, legal structure, and business model, the more likely you are to secure business credit.
Submit all required documentation to the business banker. Have one ready if the business needs a business plan to secure business funding. Have the business plan, personal financial statement, tax returns, bank statements, and business loan application filled out neatly and be ready to go.
Also see: Small business loan checklist
Brush up on loan terminology. Knowing what you’re asking for and the types of loans offered by banks can’t hurt. A brief rundown of important terms includes:
- Term loans. These business loans generally require fixed monthly payments over a specific time frame (e.g., 5, 7, or 10 years). At the end of the term, business owners can roll the business loan into a new business loan or pay the remaining balance in cash.
- Interest rates. The percentage of the cost of borrowing loan principal that the lender charges to the borrower. Expressed as annual percentage rate (APR).
- Cash flow. The amount of cash left after paying operational expenses and the new loan repayment.
- Lines of credit. Business lines of credit are revolving business loans that allow business owners to withdraw money up to a certain amount whenever needed. They’re advantageous because business owners can borrow money as they need and pay it back when business is good again. Lines of credit are commonly used for inventory and short-term cash needs.
- Collateral. Business and personal assets are used to secure a loan. Banks will hold a lien on the collateral to help make sure they will be paid back.
- Commercial real estate mortgage. Commercial real estate business loans are used to purchase or refinance business property.
- SBA guaranteed loans. There are different types of loans, but the SBA loan program is one of the more popular financing options. This type of loan comes through a commercial lender, but it is backed by the federal government’s Small Business Administration (SBA). These typically require a lower down payment than what would normally be required from a bank.
Also see: Breaking down government small business loan programs
- Personal Guarantee. A signed document from an individual stating they are personally responsible for the business loan. In most cases, anyone owning 20% or more of the business will be required by the bank to sign a personal guarantee.
- Commercial vehicle loans. Vehicle business loans are business loans used to purchase business vehicles, including vans and trucks.
- Traditional bank loan. A business loan that is not a business line of credit, business mortgage, or SBA-guaranteed business loan. A conventional loan is made by the lender in-house.
- Equipment business loans. These business loans are business lines of credit, business mortgages, or business vehicle loans where the funding is used to purchase business equipment.
- Talk to your banker and let them explain the various loan products for small businesses. Assess which products are right for you and 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.
Keep business and personal accounts separate. Business and personal financial activities should be kept separate so a lender can analyze the cash inflows and outflows of the business.
Review your credit report. Business credit cards, business bank accounts, and business lines of credit should be in good standing. Before requesting a loan, be sure to review your personal credit score and credit history to resolve any issues.
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.
Practice ansering the tough questions. Lenders will ask several questions to assess your knowledge in the business. There will likely be some “suggestions” on how to do things. Some will have warrant, others not, but take some notes and revisit later to see if they may help your business.
Practice answering questions regarding your investment and collateral to secure the project, how much is being borrowed, expected repayment terms, and how the funding will be used, and more.
Dress professionally. Banks are business institutions and business owners should dress the part. Not that you have to go in with a three-piece suit, but don’t go in too casual either.
Be confident. Going through the loan application process will make even the most experienced business owners a little anxious. If you know your business and practice answering the questions, you will be ready to meet with the bank.