Are you seeking a bank loan for your business? The process may seem daunting, but with proper preparation, it can be a much smoother journey. As with any significant business decision, understanding your options is key to finding the best route to achieve your goals.
By following these tips and tricks, you’ll enhance your chances of securing financing from the ideal bank for your business:
Do Your Homework
Getting ready to apply for a bank loan starts with organizing your documents. Have you borrowed from banks in the past? Any missed payments on loans, mortgages, or credit cards can potentially harm your prospects as a business owner.
Being upfront about past financial hardships is crucial when dealing with banks. Prior to approaching a potential lender, it’s advisable to obtain a credit report to assess your personal credit standing.
In addition to evaluating your credit history, banks will require documentation that demonstrates your income and expenses. Lenders seek consistent revenue flow that proves you can repay a loan in full. Ideally, banks consider financing up to one-third of positive cash flow – that amount represents your maximum borrowing capacity.
NerdWallet, a startup dedicated to assisting individuals and businesses in finding the best financial products, recommends having these documents and statements ready before applying for financing:
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Business overview and history
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Financial plan
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Business and personal income tax returns for the past three years
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Business licenses, incorporation documents, and franchise agreements
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Profit and loss statements, cash flow statements, balance sheets, and projected financial statements for your business
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Personal information, including address, work experience, and education
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Business address, contact information, and tax ID number
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Personal credit score and history
Explore Your Options
If you have an existing relationship with a local banker, it’s wise to consult with them before approaching other banks. A banker who is familiar with you and your business can serve as an advocate during the financing process and aid you in evaluating your choices.
Despite recommendations from some advisors, avoid applying for multiple business loans simultaneously – this can negatively impact your credit score. Instead, begin with the bank and loan type that best suits your requirements.
Small Business Administration Loans
These government-sponsored loans offer significant benefits to small business owners. Unlike traditional bank financing, SBA loans entail only a 10% down payment and provide repayment terms lasting up to 25 years. Apart from favorable terms, these loans can reach up to $11.25 million.
To qualify for an SBA loan, you must still apply through a bank or credit union. The government pledges up to 85% of the loan amount to the lender should you default on repayment (maximum guarantee of $3,750,000). Consult the SBA’s roster of the best banks for small business lending. If you’re searching for a new bank to fund your loan, commence with the significant lenders in your state.
Consider the following options:
Big Banks: Major national or regional banks typically approve around 20% of small business loans. This percentage rose to 22% in 2015, offering improved opportunities for small business owners.
In 2014, JP Morgan Chase led the way as the top lender of SBA loans, sanctioning 2,770 loans totaling $143,672,600. Keep in mind that if you require a small loan, large banks may not be the best option due to their avoidance of lower profit margins.
Local Banks: Establishing a relationship with a community bank allows for a more personalized experience with your lender. For small loans that can make a significant impact on your local business, smaller banks are more inclined than larger institutions to assist you with financing.
Credit Unions: Credit union business loans have seen steady growth since the recession, making them an appealing choice for small business owners. Leveraging their community-oriented model and strong local investment, credit unions offer lower interest rates and extended repayment terms to engage local business owners. Take a closer look!
Explore Viable Alternatives to Bank Loans
As you evaluate your loan possibilities, consider non-traditional avenues as well. Institutional lenders, factoring firms, and government loans offer distinct advantages compared to SBA loans and traditional lending practices.
Institutional Lenders: According to Rohit Arora, CEO of Bizz2Credit, institutional lenders – encompassing hedge funds, insurance companies, family funds, and other non-bank entities – have emerged as increasingly competitive loan sources. Unlike conventional banks, these lenders boast an average approval rate of around 60%, leveraging technology investments to minimize risk and expedite the lending process.
Factoring: If you contend with slow-paying customers, factoring presents a straightforward solution to fortify your cash flow. By selling your invoices to a factoring company – after deducting a fee – you receive funding within 24 to 48 hours.
Factoring firms also manage the collection process, freeing you to concentrate on your business instead of chasing invoices. Although their fees exceed those of traditional loans by a few percentage points, be prepared to relinquish some revenue for consistent cash flow.
Government Loans and Grants: State and federal governments extend loan opportunities to eligible small business owners. Business USA’s website offers a clear pathway to identify loans for which you qualify based on your background, location, and industry. Additionally, explore government grants which do not require repayment.
Your Next Steps
After considering these suggestions, consult with an expert for a thorough analysis of your options. A consultant at a small business development center in your state can assist you in making informed decisions. When meeting with them, bring along your documents and present your business professionally and confidently. A strong first impression can make a lasting impact!