Applying for a small business loan at the bank can certainly seem intimidating. This is especially true if you are unfamiliar with the requirements and technicalities of the loan review process or if you are dealing with issues that may compromise your approval, such as bad credit.
Nevertheless, with the right preparation and a little know-how, applying for a small business loan does not have to be so daunting.
The following is a brief guide that will take you step-by-step through the general application process for a small business bank loan including a few tips on how to secure the bank's financing:
1. First, you should decide what kind of loan you are looking for: secured vs. unsecured.
A secured small business bank loan is backed up with collateral. The collateral can consist of just about any kind of asset, from "hard" assets, such as real estate, equipment, or income, to "soft" assets, such as software or patents. By offering collateral, the lender is assured that if payments are not met, there will be something to seize and sell in order to recover losses.
Because the collateral reduces the risk of granting these loans, banks tend to offer better interest rates, longer repayment periods, and they can be taken out for greater amounts of money. Moreover, when a loan is backed up by collateral, lenders are less concerned about the borrower's credit history.
On the other hand, an unsecured loan is one in which no collateral is offered as security against loan should the borrower default on payments. Banks will consider a business' credit rating and financial history when deciding whether or not to approve the application.
Since unsecured loans are inherently more risky, they tend to have higher interest rates, short repayment periods, and are given out in smaller amounts.
2. Be prepared for the bank's loan requirements
Banks generally have the following requirements when considering a business loan application:
-A Good Business Plan. A solid business plan is one of the best assets you can bring to the bank when applying for a small business loan. A lot of information needs to be included in your business plan. Here is a brief check list:
Be sure to include a precise breakdown of your products. Do you manufacture, resell, or liquidate your product line? If you are service provider, then explain clearly what service(s) you offer.
What is your niche market? What distinguishes your business from competition?
What marketing and advertising strategies do you implement and what are the costs involved?
Be sure to include your niche market and what distinguishes you from your competitors.
You should also explain the purpose of the business loan, including a breakdown of the profits that you hope to achieve should the bank approve your application and any future goals and profit projections.
-Financial Statements. Providing clear and accurate financial statements is important since banks will use them to assess your business’s ability to repay the loan
-Credit History. The higher your personal credit score, the more likely it is that you will get a business loan with favorable terms.
If you are running a new business or if your personal credit score is low then you can expect that the requirements for approval will be stricter. In such a case, you may be required to either find a co-signer on the loan or offer a personal guarantee. You should also make sure that your personal and business credit profiles are separate.
3. Know how to maximize the interview for a bank loan
Being prepared for the interview can positively effect your approval process. Make sure to phone ahead and arrange an appointment with a loan officer.
Be aware that there are optimum times to schedule your meeting. Try to avoid meeting on the first and fifteenth of every month, as well as Mondays and Fridays, since on those days the financial traffic at a bank increases. The best time for an appointment is in the middle of the week during the bank's morning hours.
Make sure to pay attention to your personal appearance as well as the way you express yourself. You should also make sure to bring plenty of personal references.
4. What documents will you be asked to sign?
The loan agreement: This document sets forth the details of the small business loan. It includes information about the terms of the loan as well as the representations, warranties, and covenants of the borrower.
The promissory note: This document details the terms of the loan repayment, including the principal and interest, the length of the loan, late fees, and whether there is a prepayment charge. It also describes the circumstances under which the bank would declare your loan in default, as well as what happen should a default occur.
Security interest: If you decide to get a secured business loan, then a security interest will be included in the documentation. This section details the interest a lender has in the particular property that is being used to secure the business loan against the possibility of a default.
The guarantee and surety agreement: This represents your promise to the bank that if your small business defaults on the loan, you will pay back the financing you received with your personal holdings, such as the equity of your home.
5. Know when to seek an alternative to a small business bank loan
There are several instances where securing a small business bank loan may not be a viable financing option:
-The owner has bad personal credit. With small business bank loans, you are often judged on your personal credit. Thus, if your credit rating is not good, and you have not separated your personal credit profile from that of your business, then you will have a much harder time getting approved.
-Business performance is poor or limited. Many banks look for two or more years of profitable operation when considering a loan application. This is generally a problem for new businesses. Even if a new business has been operating for two years, sales and operations are generally slower at the beginning.
-Financing is needed quickly. The approval process for a business loan can take several weeks. Thus it is generally not a good option for emergency funding. Moreover, it is difficult to get a business loan from a bank in order to offset operating losses.
A Step-By-Step Guide to Applying for a Small Business Bank Loan - To learn more about this author, visit Gary Barzel's Website.
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