The biggest cause of failure for new and small businesses is insufficient working capital. If you don’t have enough working capital you are most likely to run out of cash before you establish enough clients to sustain your business. One source of start up capital is a business loan from a commercial bank.
Banks Policy on Small Business Loans
Before you go out to seek a loan from a lender you need to understand how lenders think and operate. Lenders are only willing to work with a business person who is already taking a risk in a business. They often require you to have contributed at least 25% of the starting capital. You must also be willing to provide other personal guarantees like, real estate, motor vehicle and stocks. In short, a bank won’t work with you if you are not willing to risk your money and other assets.
They also prefer dealing with an existing business over a new business. If you have been in business for 2-3 years you stand a better chance of wringing money out of a bank manager. Lenders are happy to advance money to a business that can demonstrate a history of settling debts, bills and payment to suppliers.
Now that we know how lenders think and operate, let us now explore how to present a compelling case for a small business loan.
Preparing a Small Business Loan Proposal
Almost all lenders have a printed document to guide you in applying for a small business loan. Just approach your lender of choice and ask for a “Loan request form” or “Small Business Loan Application Form”
Items compiled into a small business loan request form include the following:
– Amount of money requested
– Monthly revenues
– Monthly expenses
– Collateral, if any is owned by the business
– Total debts
These information must be backed up by audited statement of accounts. It has to be the latest.
Have a relationship with your bank
You stand a good chance of getting a small business loan for your business if you have an on going good relationship with a lender. Don’t just set up a bank account and just be going to the bank to deposit and withdraw money. Take time to know the people who work at the bank. The key people every business person should know are, the credit manager and branch manager. If it is a small community bank you won’t go wrong by knowing a member of board of governors.These are the decision makers in the bank and if they know you well and can vouch for your character, they will always recommend approval for your loan request so longer as your request is reasonable.
Being loyal to one bank has big advantage. The bank has all the details of your in comings and out goings and they will have all the evidence they need to make a decision on your application. Also, they already know your level of trust worthiness.
Proving worthiness of your proposal
Lenders always follow a formula in determining whether to give or not give a loan. The lender will always want to know whether the loan can be repaid. They will comb through your documents looking for evidence on how the loan will be repaid.
Your small business loan application will be made or broken by your cash flow. If there is evidence of money coming in, the lender won’t hesitate to advance the loan. Have a solid business plan to inspire the lender’s confidence in your business. In addition to sales projections and cash flow projections, provide information on business operations, marketing efforts, management ability, and personal balance sheet demonstrating the worthiness of the business.
If You Don’t Succeed At First….So What?
If you write the best loan application form and you don’t succeed, don’t lose heart. There are many reasons why a loan officer might turn done your request. He might have disliked the suit you came in wearing(you looked cheap), he might have been uncomfortable with your attitude or the bank might be short of money to lend and he does not want to cause alarm by making it public. Banks are businesses operated by humans. Humans have a habit of allowing their bias to influence their decision making. What am trying to explain is the reason to reject your loan may be personal rather than commercial.
If one lender rejects your request, move on to the next lender.