Applying for bank business loans is like being a contestant on Shark Tank. Contestants of the television show get grilled with questions about income, expenses, collateral, assets, suppliers, employees, business plans, projections, obstacles, and more! When applying for a small business loan, ask yourself, "What would a shark want to see?" Yes, what would Mark Cuban, Barbara Corcoran, or Robert Herjavec demand from the loan proposal. Getting a shark as an investor is very similar to getting a loan officer to issue a small business loan.
The Process of Getting Loans to Start a Business
Bank business loans are the bread and butter of any banking operation. Banks are able to operate because of the income loans generate. Banks don't make a lot of money with free checking accounts, after all. Thus, it's important to only approve the best.
Banks employ gatekeepers who act like sharks swimming between you and the loan you so desire. But there are ways to swim with the sharks. First, banks want to give loans to people who are doing okay financially. This is why small business startup loans are difficult to obtain. Loan officers prefer working existing businesses who have proven themselves. Loan officers look for a few main traits in a borrower:
- A Record of Success in the Industry
A lending officer doesn't just look at numbers. Lending officers look at a person's entire business life. After all, it would be pretty hard to deny the CEO of General Motors if he wanted a loan to start a new car company.
Success in the industry also means the borrower probably has good credit. A 'hard' credit pull will usually be done before a loan is issued. A 'hard' pull typically dings your credit score by a few points. However, most credit card companies even do this type of pull.
- A Cash Flow Sufficient Enough to Make the Loan Payments
It's often said that banks enjoy giving loans to people who don't need loans. With this in mind, it's important to let the bank know of all income streams when making the proposal. Ideally, the business is already making a profit. The loan can then be used to increase the profits.
- Many Personal Assets Which Can Be Used as Collateral
Collateral can be anything of value. When using collateral, you're basically saying, "If I'm unable to repay the debt with income, the bank has the right to take away these existing assets." It carries possibly life-changing risk but some business people are more than willing to put up collateral. Many family farmers, for instance, use their existing farmland for collateral. They buy one farm, pay it partially off, and then use it as collateral against their next farm purchase.
If the business were to flounder, business assets (or even personal assets) could always be sold to make the loan payments. This goes back to the idea that lenders like giving loans to people who don't need them. A person with a lot of collateral could obviously sell it to fund the business.
Convincing a Bank to Issue Small Business Startup Loans
Despite what naysayers believe, startups can get financing. We review lenders that provide startup loans, micro-financing loans, and more alternative business loans. If you'd like to consider even more alternative lending options, here are financing options to consider:
- Using credit cards
- Asking friends/family for financing
- Product pre-sales
- Home equity loan
- Selling assets
- Angel investors
- Venture capitalists
- Vendor financing
Although alternative funding methods are available, bank business loans are the most appealing method of financing for most entrepreneurs.
Final Thoughts about Obtaining Small Business Loans
Remember when applying to impress the loan officer. Loan officers enjoy someone who is professional, prepared, and successful. Even when applying online, project confidence in your written word. Lenders make money on small business loan interest because they actually issue them. They want to give you the loan! Just show them they can make money by giving the loan. Loans should be beneficial to both parties. The loans are out there - even for startups. Once you see things from a lender's perspective, it's easier to get a loan.