At some point, most small businesses will need to secure a loan in order to grow. In tough times that can be a
difficult challenge. However, the better prepared you are, the better your chance of success.
Put yourself in your banker’s shoes. Three of the first questions in your banker’s mind are: Why do you want the money? How will you spend the money? Are you a good risk? Every step you take should prepare you to answer those questions honestly and with conviction.
Determine your need. Why do you need the money? Make sure your plan is well thought out, realistic, and practical. Be clear to both yourself and prospective lenders what business objective(s) you plan to achieve with a loan.
List the costs. Once you have specified why you need the money, do research to determine the costs for all items, services, supplies, etc. that you will need in order to achieve your goal. Cast a broad net. Factor in fees, taxes, and any and all associated costs. Once you have your figure, add a contingency reserve for unforeseen expenses. Determine whether you need all of the money up front or over a period of time.
Determine how you will repay the loan. Review your cash flow and financial projections to calculate your re-payment plan. Your banker wants to know that you are a good risk and will have the cash for regular payments. Show how you intend to repay.
Determine what type of loan you need. Two basic types of loans are secured loans and unsecured loans. A secured loan requires putting up one of your major assets as collateral (a bank account, home, etc.). One option is a home equity loan or home equity line of credit (HELOC). This puts your home at risk, so be cautious about using that option. There are additional costs for guaranteeing the collateral. However, if you have a poor credit history, this may be a way to improve it. Unsecured loans require no collateral but are much more difficult to obtain. You will need a high credit rating and will need to provide much more personal and business financial information, including a business plan.
You better shop around. If you are looking for a secured loan, talk to the loan officer at your bank, and ask for information about their loan programs and the borrowing terms, rates, limits, and variables of each program. Before you make a decision, shop around. Research nformation from other local banks and internet lenders. Compare loan rates on the same basis, such as APR. Take into consideration the terms, conditions, fees, and penalties, as well as the rates, of each potential loan, and choose the loan program and bank that best fits your needs.
Be prepared and be thorough. Show your bank that you and your plan are a low-risk proposition. At a minimum, you should be prepared to present a complete loan application, have strong business and personal credit, address how the money will be used, and be able to prove your ability to repay the loan. For unsecured loans, you should prepare a typed cover letter and documentation listing your business objective, how much money the project requires, the amount of money you or others are investing in the project, the loan amount needed, and how the money will be spent. Include copies of cash flow and financial statement projections for at least three years, any pertinent graphs or brochures that support your request, and a business plan. No business objective is without risk, so be sure to address any risks you foresee and how you will overcome them.
Make your case. Before you present your case, review your information, practice what you will say, and be prepared to answer questions. Expect to spend about 30 minutes presenting your case to a loan officer. Dress professionally, treat bank officials with respect, and convey your case honestly and confidently, using accurate figures to support your claims.
If you do not succeed on your first attempt, learn from your experience and try again elsewhere. Ask the lender what factors led to denial of your request. Be prepared to overcome these before approaching the next lender.