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Business Loans – What Lenders Look for and Tips for Winning Them Over

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Business Loans – What Lenders Look for and Tips for Winning Them Over

By Caron_Beesley, Contributor
Published: January 22, 2013

Securing small business financing can be challenging. Whether you are just starting out or looking to grow, banks and lending institutions can be rigorous in their lending review practices.

For example, businesses with few assets to their name may find it hard to secure a traditional loan. Other business owners may not be able to provide the reassurance that lenders seek to alleviate their concerns that your business may fail and the loan won’t get repaid. So when you approach a lender, it’s just as important to understand the basis on which loans are made as it is to stack up your financials and business plan.

So what are lenders looking for in a potential loan applicant? Here’s what you need to know.

Loan Applicants Need to Check off Several Boxes

What are loan officers looking for when approached about a loan? Here are some basic “must-haves” that the ideal candidate might be expected to evidence:

  • That you have sufficient assets, financial reserves and personal collateral to endure business fluctuations (and still pay off your loan)
  • As an existing business owner, you’ll need to show that you have solid cash flow, sufficient to repay the loan
  • New businesses need to evidence that they have a track record of profitability and success in a  similar business endeavor

Let’s face it, that’s a tricky list for any prospective or existing small business! So what are your options? Proving your creditworthiness is still possible, with some planning and preparation.

How to Prove Your Creditworthiness

Bankers need to make money, and while they may have an ideal candidate in mind, even they have to compromise­—this is where your opportunity lies. The trick is to demonstrate, using other means, that you are a creditworthy business owner. For example, if you are new to this business, can you show success in managing a similar business another field (even if you weren’t the owner)? Perhaps you’ve owned or managed a profitable business in a different industry? Lending officers might be more agreeable to your application if you can show that you supplement your own experience with that of someone who also has success in the field.

Putting yourself in the lender’s shoes is a good starting point. It’s much like a job interview, where you form an understanding of the type of candidate the employer is looking for and prepare your application and anticipate questions accordingly. Ask yourself: “Why should this lender think my business can succeed where others have failed?” and have a thorough answer prepared, plus a detailed explanation of how the money will be used and your plan for paying it off.

Step Back and Prepare

Key to this preparation is a solid business plan, good personal and business credit, and some expert help. The following SBA resources and tools can help guide you down this preparation path:

  • Build a Business Plan Online Tool – Putting pen to paper to write a business plan isn’t the easiest of tasks. Check out this new tool from SBA that guides small business owners through the process of creating a basic, downloadable business plan—and offers pointers on essential elements like cash flow and financial projections. The great thing about this tool is you can build a plan in smaller bites, save your progress and return at your leisure.
  • Clean Up Your Credit – Business credit is an asset and considered an economic resource that makes up the financial foundation of a company. Lenders look for assets. SBA guest blogger Marco Carbajo blogs regularly about how to build your business and personal credit to help secure financing. Check out his article, How To Build Business Credit For Your Start Up, and view more of Marco’s articles here (you’ll need to log into the SBA Community to follow this link).
  • Consult an Expert – Whether you need help finding the right loan for your business or a guiding hand that can help you through the application process, don’t feel that you have to go it alone. Local Small Business Development Centers, Women’s Business Centers, and SCORE (a mentoring organization for small businesses) can help you through the process. Find one of these groups in your community.

Can’t Get a Business Loan? Consider Alternative Financing from SBA Loan Programs

If you or your lender decides that you aren’t the right candidate for a traditional business loan, you still have options. Consider an SBA Loan Program. The SBA doesn’t lend businesses money; instead, these programs take the risk away from the banks and encourage them to make loans to small business owners by guaranteeing part of the loan.

Check out these additional online learning resources that can help you navigate the SBA loan process:

About the Author:

Caron Beesley

Contributor

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

Comments:

In the loan business is very normal but for our loans require collateral that is a big problem that not everyone has the courage
This is great information to know as an employee who is looking to work from home. I also find the comments very helpful as well!!
The trouble with those new companies in the market is that they are not thinking about the big picture enough. I am working on a start up at the moment in this area that has the potential to blow this market apart. Banks will not be obsolete, but their nature will change under what we and, no doubt, others are proposing. Finance may be about to face it's own 'Spring'. Beware those carrying debt...
Good article, thanks. While growing my company I always say we used “bootstrap and bank debt.” There are three keys that I would add to what has been said. First, spend time developing a solid relationship with your loan officer. Have them visit your company, meet some of your employees, and try your product (if appropriate). That way you are more than just words and numbers on a page when they review your documents Always under-promise and over-perform. Whenever a proposal is submitted, be sure it is well in your comfort zone for your expected performance. If the company meets the “stretch goals” that’s great, but those bigger goals should always put you over the top of what was promised. Consistently meeting and exceeding your projections gives you good credibility for future projects that need bank funding. And third, own your numbers! Know your revenues, gross margin, SG&A, accounts receivable days, inventory numbers, your debt-to-worth ratio and how all of these have been trending. If you can do sixth grade math, you can know these numbers. Don’t say “my accountant can answer those questions.”
Just as a qualifier - banks don't fund startup businesses. Banks (all lenders) want to get repaid - just like you want to get paid in your business. Thus, you have to show that you 1) have the willingness to repay - usually shown by your credit report and how you have repaided other obligations and 2) you ability to repay - usually shown by your business's cash flow, positive cash flow at time of application not what you think you can do after you get a loan. Alternative loans are great but most of them rely on the business already earning some form of revenue - cash advances are based on revenue - either from credit card receipts or actually cash flow (positive or not) or the conversion of financial assets - which means that you have to have busienss to have those assets. Want to fund a small business or startup, clean up your credit and seek out personal loans and resources (called bootstrapping) until your business grows up enough to qualify for more traditional loans.
Hello Caron, The loan process is long and can sometimes be frustrating!! I think it's important to really consider if it is Feasible for you or your growing business. Sometimes it's better to put off the loan when you or your growing company are more financially stable just to be sure it is a financially responsible decision.

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