Twelve Tips for Getting Your Bank Loan Approved

Securing a bank loan to finance your small business is getting to be more difficult. Here are twelve basic steps you must take before going to the bank for a business loan.

By Isabel M Isidro
Managing Editor

Finding the money needed to start a new business is almost always one of the most difficult obstacles new owners face. The most likely (and easiest) sources of capital are your families, friends and own savings. However, you should not overlook institutional sources as well.

Without a previous track record in business, securing a bank loan may be difficult. 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 the steps that you should take to improve your chances of getting that much-needed bank loan:

1. Keep in mind that to stay in business banks need to make loans. Do not be afraid to ask for one. That is what the loan officer wants you to do. To increase your chances of getting a loan, look for a bank that is familiar with your industry and who has done business with companies like yours. Seek out banks that are 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 government participations involving direct government funds or loan guarantees). However, be aware that banks often demand stiff collateral requirements for start-ups.

2. As an entrepreneur, make sure that you are thoroughly prepared when you go to your banker's office to request a loan. You need to show your bankers that a loan to you is a low-risk proposition. Have on hand a completed loan application, copies of cash flow and financial statement projections covering at least three years, and your cover letter.

3. Learn to anticipate every question that he or she has. Remember, the combination of information and preparation is the most powerful negotiating tool in the world. A confident and thoroughly prepared borrower is four times more likely to have his or her loan approved than a borrower who does not know the answer to some of the basic questions a banker asks. To show the extent of your preparedness, your business plan should also include answers to your banker's questions. These questions normally are:

• How much money do you need? Be as exact as possible; although adding a little extra for contingencies will not hurt.
• How long do you need it for? Be prepared to go into detail about what the money will do for you and why your business is 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 you will repay for 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 will you do if you do not get the loan?

4. Do not take an apologetic and negative attitude. Keep your negativity in check. Present yourself as an entrepreneur who can and will repay the loan. Boost your image by providing your loan officer with any promotional materials about your business, such as brochures, ads, articles, press releases, etc.

5. Dress in a professional manner for the interview. This is a business transaction, so treat it as such.

6. Do not stretch the truth in your loan application. Broad, unsubstantiated statements should be avoided. The lender can easily check many of the facts on your application. If you cannot support statements with solid data, then don't make them. Do your homework and spend time doing research to be able to support everything you say, including every single number in your projections. It is best to keep projections, assets lists and collateral statements on the conservative side.

7. Be sure all your documents are neat, legible and organized in a cohesive and attractive manner. Type all your loan documents. Handwritten documents look unprofessional. Don't forget to include a cover letter.

8. Do not push the loan officer for a decision. Doing so might result in a rejection. Your banker cannot make a decision until all your documentation is complete. To ensure a speedy decision, make sure that your application 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 to you. Visualize in your mind the positive results of your bank application.

10. Keep trying one lender after another until you get your loan. To improve your position as you change bankers and banks, the best way is to ask for a referral from a successful entrepreneur. Before you decide to approach a bank directly, find an associate, friend or acquaintance that is in good standing with the bank to give you a good referral. Bankers tend to deal more favorably those who were referred to them by their best customers.

11. Failure to discuss risk in your application. You must remember one thing: there is no business without risk. If you do not discuss risk, the bankers will assume that you haven't thought about risk. Let's face it - try as we might, we cannot plan for everything, for every contingency, for every turn of events. Bankers would want to know if you have planned for the major risks and how you intend to manage it.

Then, there is also the risk of too much success. The demand for your products or service may exceed well beyond your expectations, and they would want to know how you intend to handle success.

12. Remember that 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. They are not venture capitalists that make high-risk loans regardless of the profit prospects of your business. Bankers prefer to lend to low-risk, low profit ventures than to high risk businesses or those with no record of accomplishment.

About the Author:

Isabel M Isidro is the Managing Editor of Power Homebiz Guides. For a step-by-step guide to starting a business, order the CD-Rom "Power Home Business Ideas" from PowerHomeBiz.com at http://www.powerhomebiz.com/Index/powercd.htm

The SBA Loan Guaranty Program

So, the government is here to help! Understanding the SBA program will ease some of the concerns many people have about getting assistance from the government for their business. Learn:

How the SBA works

The different options of SBA financing

Why not to worry

What Is the SBA?
The U.S. Small Business Administration is an agency of the federal government, established in 1953 to assist small business enterprises. The most important program operated by the agency is the loan guaranty program, which provides a financial guaranty to qualified, eligible businesses to enhance their ability to obtain long-term capital financing from the private sector.

The SBA loan guaranty program has grown steadily over the years. Since 1989, with the advent of many regional bank consolidations and stricter federal banking regulations, the volume of SBA-guaranteed loans has more than tripled. In FY 1998, the agency guaranteed over $10 billion in loans to over 50,000 small businesses. In the process, the agency assisted with the creation of hundreds of thousands of jobs across the United States.

Although the SBA conducts many programs to assist small businesses, the focus of this book is on the assistance provided by the 7(a) Loan Guaranty Program. This information is also applicable to the 504 Program, which is administered through SBA-licensed, certified development companies.

The regulations governing these loan guaranty programs are subject to change from time to time. However, this book will provide the reader with a broad view of the regulatory and financial requirements necessary to determine eligibility and qualifications for the borrower. Mainly, the book will help the reader in the efficient and effective development of a commercial loan application.

The Loan Guaranty Programs
The two SBA loan guaranty programs that are currently funded by Congress for small businesses are the 7(a) Loan Guaranty Program and the 504 Program. They are governed by different regulations and are distinguished by: (1) eligibility standards, (2) restrictions on the use of loan proceeds, (3) repayment terms, and (4) the borrower’s approval process. These two programs are described below in order for the borrower to understand what kind of funding can be obtained through the agency.

* Source The SBA Loan Book

The comprehensive handbook for obtaining a Small Business Administration guaranteed loan.

Friends and Relatives

You, like most of us, are probably reluctant to ask friends and relatives for money. But a lot of people do, at one stage or another, when they are running their own businesses. If you are really serious about starting and/or staying in business, swallow your pride and go beg for those funds.

If your friends and family express an interest in assisting you with your business financing, pitch them professionally. Make a sound, cohesive loan request presentation just as you would to a bank or other lending source. Don't be embarrassed to show financial statements, tax returns, or whatever else they want to see. Do anything to get that money!

You will want to prepare a written agreement about any loans. If you don't, bitter arguments are bound to sour the relationship eventually. Even some minor detail, such as the timing of interest payments, can cause great friction if arrangements aren't backed up in writing.

Don't be surprised when your friends and relatives suddenly turn into business tycoons once they have agreed to lend you funding. They may insist on terms that are more stringent than those you might get through a commercial bank!

* Source Streetwise Small Business Start-Up

Personal Loans

Personal loans are a great back-door alternative when seeking financing for a small business venture.

One of the most common means for attaining funds for use in operating a small business is through a home equity loan. If you have been paying your mortgage for a few years, you have probably built up some sizable equity in your property. Banks loans taken against a person's primary residence are low-risk no matter what the funds are going to be used for. You can take the proceeds garnered from a home equity loan and use them to operate your business. Then, technically, you are financing your business, not the bank.

If you use the proceeds from a personal loan to finance your business you do, however, need to make this clear on your loan application. If you lie on a loan application you have committed fraud a serious criminal offense.

* Source Streetwise Small Business Start-Up

Business Loan Glossary

Accounts Receivable Financing - A loan gained by borrowing against receivables. Loans are paid down as receivables are collected.

Annual Fee - The amount charged by the lender each year to cover the administrative costs of the loan.

Business Credit Card - An amount of money, which a business can borrow against at times it needs capital. Using a card accesses the money.

Commercial Real Estate Loans - Similar to residential mortgages, but collateral is business property. Interest rates are usually fixed, the length of the loan can range from 5 - 20 years and payments due monthly.

Commercial Term Loans - Loans made to businesses that can be either secured and unsecured. Usually made to mid-size and large businesses.

Credit Rating - A predictor of the ability to pay back a loan. The credit rating is a result of credit scoring

Credit Report - Financial history supplied by a credit information company like Dun and Bradstreet, Equifax, Experian or TransUnion. Contains credit information on a business or an individual, including payment history of bank cards, store cards, mortgages, student loans, and trade payments.

Credit Scoring - The evaluation system used by lending institutions to determine relative credit riskiness of a business or consumer. When evaluating businesses, it generally considers factors such as credit payment history, new credit sought by owner of business, and financial strength and longevity of business.

CreditFYI - A web site for checking business credit reports

Debt Financing - A loan with pre-agreed terms, including payback schedule and interest.

Dun & Bradstreet - Leading provider of business credit information.

Equifax - One of three leading providers of personal credit information.

Equipment Leases - Leases allowing companies to purchase new equipment.

Experian - One of three leading providers of personal and business credit information.

Fixed Interest Rate - An interest rate that is the same throughout the life of a loan.

Interest Rate - The amount charged by a lender for the money borrowed. It can be fixed or variable.

Inventory Financing - Money borrowed on the basis of finished inventory. The loan is paid as inventory is sold.

Line of Credit - An amount of money, which a business can borrow against at times it needs capital. Often accessed by check, ATM, or business card.

LiveCapital.com - A web site for small business loan offers from a variety of lenders instantly.

Loan Term - The length of time the borrower has to repay debt.

Long Term Debt - Financing used to purchase or improve assets such as plant, facilities, large equipment and real estate.

Maturity - A loan's maturity is the life of the loan; that is, how long you have to repay the loan. It usually applies to term loans and not lines of credit.

Multi-Lender Environment - Numerous lending institution sharing the same site and information to provide instant financing to small businesses.

Personal Guarantee -A guarantee that the primary owner will assume personal responsibility for repayment of the loan, should the company not repay the loan.

Prime Rate - The rate a lender charges its best customers. The rate is calculated differently by each lender.

Revolving Credit - It is the same thing as a line of credit: an amount of money, which a business can borrow against at times it needs capital. Often accessed by check, ATM, or business card.

SBA Loan - Loans to small businesses unable to secure financing on reasonable terms through normal lending channels. The program operates through private-sector lenders that provide loans, which are guaranteed by the Small Business Administration (SBA) -- the SBA has no funds for direct lending or grants.

Secured Loan - A loan secured by specific collateral. Creditor may foreclose and seize the specific property that is collateral to satisfy an unpaid secure loan.

Small Business Administration -Established by Congress, the SBA provides financial, technical and management assistance to help Americans start, run, and grow their businesses.

Short Term Debt - Financing used to secure cash for accounts payable and inventory.

Subsequent Draw Fee - It's a fee that the financial institution may charge each time you use the line of credit after the initial use.

Term Loan - A loan for a specific amount of money. It has either have a fixed or variable interest rate, matures in between one and ten years and has a set repayment schedule.

TransUnion Corporation - One of three leading providers of personal credit information.

Unsecured Loan - A loan granted upon the good credit of the borrower. No collateral involved.

Variable Interest Rate - An interest rate that changes during the life of a loan.

Sponsored by LiveCapital.com

Banks

Banks are the primary financing vehicle, other than owner's savings, for small businesses.

Banks like to use hard assets such as buildings, motor vehicles, or equipment as collateral against loans. They will loan against receivables and inventory, but, especially in the case of smaller businesses, tend to heavily discount the protection these assets offer. They are afraid the inventory and receivables will be converted to cash in order to cover operating losses if the business experiences any financial difficulties.

While banks like the ultimate protection of hard assets, they also want to feel that there is little chance that the business, or the bank, will have to call upon these assets to pay off the loan. Banks don't care whether or not your business has sky-high profit potential. They are only interested in the business' ability to cover the principal and interest payments.

In making a proposal for a loan, the bank will want to see all of your recent tax returns, financial statements, and cash flow projections. They will also want to know how much you would like to borrow. And, if yours is a small business, it will expect you to conduct all of your business banking activities through its institution.

Banks are reluctant to loan to businesses that cannot show at least two years of profitable operation. They want to see that the owner of the business is heavily invested in the enterprise. And, typically, they won't make loans in amounts that exceed 50 percent of the firm's capitalization.

Many bankers feel they are extending a loan not only to the small business, but to the owner-operator as well. They will feel more comfortable loaning business funds to someone with community ties, who has experience related to the business he or she is conducting, and who has made a complete and total commitment to that business.

Small business loan criteria vary greatly from one bank to another. It can even vary from one loan officer to another. If you have been turned down by nine out of ten banks in your region go ahead and try the tenth. While all banks and loan officers consider the same factors when weighing a loan request, they will place different emphasis on those factors. Some bankers place great store in hard asset collateral, some in the profitability or continuity of the business, and yet others will go with their impression of the owner as the deciding factor.

* Source Streetwise Small Business Start-Up

Getting a Bank Loan

What are the three `c's`?

Traditionally bankers look at what are called the three `c's`: character, credit and collateral. Character means more than not having a criminal record. It means that the banker feels confident that you are not going to suddenly disappear for parts unknown if the business runs into trouble. Specifically bankers like to see ties to the community such as long residence, family ties, and home ownership. A clean credit history is important. A couple late credit card payments shouldn't be a factor, but missing mortgage payments for three months in a row will require a good explanation. Bankers like good character and good credit, but they live for solid collateral. Equipment, buildings and trucks--that's the kind of stuff that bankers really like for collateral--solid value and likely to be worth a lot even if the business goes bust. Inventory, raw material and goods are second choices for collateral--they will lose their value more quickly than fixed assets but still be worth something.

Can you get a business loan?
The criteria for business loans varies much more widely than for consumer loans and often varies quite a bit from one banker to the next at even the same bank! However here are some rules of thumbs to give you an idea of your chances of getting a loan.

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

How to get the bank's money, even when the bank says `no!`
Banks have much more lenient standards for lending to consumers than to businesses. So what you can do is borrow the money from the bank as a consumer and then turn around and personally invest the funds in your business. Just make sure that you never lie how about you are going to use the proceeds on a loan application. For example you could apply for a home equity loan to tap any available equity in your house. Then take the funds and invest them in your business. The bank feels safer because their statistics show that home equity loans or much more likely to be repaid than loans for brand new businesses. No equity in your home? Maybe you can get a car loan?

Getting an appointment with a bank
Don't just show up in person--first make an appointment by phone. Ask the receptionist in the bank or the loan department for the name of the appropriate person who would handle your loan request. Of course it would be better, but not necessary, to get a referral from a friend or advisor such as your lawyer or accountant. When you get the name of the appropriate loan officer simply ask for an appointment. Don't offer any more details over the phone, unless the loan officer requests them. The more details you offer over the phone, the greater the chances you won't get the appointment at all. Sound confident. Sound matter of fact. Sound like you don't even need the money... that's the kind of person that loan officers like to lend to.

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