The right way to get a small business loan

Working with a bank to get a small business loan can be an easy or difficult process, Depending on your readiness to meet with the lender and discuss your business situation and your needs. 

One of the main causes of business failure is insufficient seed capital. Ironically, however, lenders rarely approve loan applications for businesses that need mall business credit most urgently. Instead, lenders prefer to offer small business loans to companies that have been in business for two or more years.

According to All Business, an estimated  95 percent of all entrepreneurs started their businesses with capital from their own pockets or with money borrowed from family, friends, or someone else in their community.  Lenders want business owners to risk their funds into the business venture and often require that the business owner(s) provide at least 25 percent of the capital required to start a business and at least that much money in the business if the Business exists already.  Simply put, lenders aren't as willing to take risks when a business owner isn't even risking their own money on the investment. Businesses that have successfully paid their bills for two and a half to three years will have an easier time getting a small business loan because they have demonstrated their ability to meet financial obligations.

 Preparing a Small Business Loan Proposal 

 As you prepare to apply for a small business loan, be prepared to face the facts against you and use them to your advantage. Persistence is required if you want to get a small business loan. Lenders follow specific criteria to determine if the small business loan is a good investment for the bank. More importantly, the bank determines whether the small business loan is likely to be repaid. As with other companies, banks and other lenders must respond to their investors and shareholders, and bad loans indicate instability at the bank or financial institution.

Items that are assembled in a small business loan application include the following:

- Amount of money requested

- Probability of business profitability and evidence of cash flow required to service a small business loan

- Collateral, if any, is property

- An Appropriate Balance Between Debt and Equity

Know Your Banker

Whether you are a new small business or an established small business, the first step to obtaining financing through a small business loan is to establish a  relationship with your banker.  Consider asking your bank manager to prepare a file for your business and provide quarterly or annual income statements. If your business needs financing, the bank already has a file and is at least somewhat familiar with your procedures. When it comes time to apply for a small business loan, approach the banker with a solid business plan to inspire the lender's confidence in your business. Please provide information on business operations, marketing efforts, management skills, and financial projections for three years, as well as a cash flow projection and personal balance sheet that demonstrate the value of the company. 

To prove creditworthiness for a small business loan, prepare the appropriate documentation. Keep your credit data as clean as possible. A lender assumes you run your business the same way you run your finances. The worse your credit score, the lower your chances of getting a small business loan.

When applying for a small business loan, look for a lender by first contacting the bank or banks with which you currently do business. Because you will need to share all of your personal and business financial information, it may be beneficial to apply to a financial institution that already has that information on file and may be familiar with your profile and spending habits.  If your credit is good, your changes are good to be approved for the small business loan.

If you can't work with a bank or credit union where you currently do business, or if you'd rather not work with your bank or credit union for your business loan, find a lender who will want your business.  Check the business section of your local newspaper for special financing offers for small business loans and other loans. These lenders are actively looking for people who need small business loans and the process of getting a small business loan with these types of lenders can be easier and quicker. Check with credit unions, too. Since credit unions are typically smaller financial institutions, you may be able to speak directly to a loan decision-maker. Larger banks and other types of large lenders may have stricter rules for small business loans, and the processes they use may be more complicated for small business loans. 

If You're Unsuccessful At First

If your first attempt at a  business loan fails, don't be discouraged. Small business loans are often not approved by the first lender you approach, and rest assured you are not alone. Especially if you are a new business, lenders do not always approve small business loans even in the most ideal situations. Look for other lenders, or be resourceful and look for other sources of credit instead of a small business loan, including home equity loans and Personal loans, both of which can be used to finance a small business.