Are you looking to secure a bank loan for your business? What seems like a painful and arduous process is exponentially easier with a bit of preparation. Just as with any big business decision, knowing your options can help you find the path of least resistance to your goals.
With these tips and tricks, you increase your chances of getting financed by the best bank for your business:
Do Your Homework
Preparing to apply for a bank loan starts with getting your documents in order. Do you have a history of borrowing from banks? Failing to meet your payments, whether for an auto loan, mortgage or credit card statements, can be a detriment to your prospects as a business owner.
Transparency about past financial struggles is the best policy when it comes to approaching banks. With that in mind, apply for a credit report to get a sense of your personal credit before you speak to a potential lender.
In addition to considering your credit history, banks will ask you to provide statements that point to your revenue stream and expenses. Lenders look for consistent revenue that indicates you will be able to pay back a loan in full. In optimal circumstances, banks consider financing one-third of positive cash flow — that number is your upper limit.
NerdWallet, a startup that helps people and businesses find the best financial products, suggests you prepare these documents and statements before applying for financing:
Business overview and history
Business and personal income tax returns for the past three years
Business licenses, incorporation documents and franchise agreements
Profit and loss statements, cash flow statements, balance sheets and projected financial statements for your business
Personal information, including address, work experience and education
Business address, contact information and tax ID number
Personal credit score and history
Explore Your Options
If you already have a personal relationship with a local banker, speak to them before approaching another bank. A banker who knows you and your business can act as an advocate during financing and help you to assess your options.
Regardless of what some advisors may suggest, do not apply for multiple business loans at the same time — it can hurt your credit. Instead, start with the bank and loan type best suited to your needs.
Small Business Administration Loans
These government-sponsored loans offer undeniable advantages for small business owners. Unlike financing offered by conventional banks, SBA loans only require a 10% down payment and offer repayment terms up to 25 years. Better terms don’t mean a limited budget, either — through an SBA loan, you can borrow up to $11.25 million.
To be eligible for an SBA loan, you still need to apply through a bank or credit union. The government guarantees your lender up to 85% of the loan if you were to fail to pay it back in full. (Their guarantee maxes out at $3,750,000.) Check out the SBA’s list of the best banks for small business lending. If you’re searching for a new bank to finance your loan, start with your state’s biggest lenders, and go from there.
Here’s a breakdown of your options:
Big Banks: National or regional banks with a wide impact approve, on average, 20% of small business loans. This percentage has increased to 22% in 2015, offering better opportunities for small business owners.
In 2014, JP Morgan Chase was the top lender of SBA loans, approving 2,770 loans totalling $143,672,600. Note that, if you only need a small loan, big banks may not be your best bet, as they shy away from smaller profit margins.
Local Banks: Working with a local bank allows for a more personal relationship with your lender. If you’re looking for a small loan that can have a positive impact on your local business, smaller banks are more likely than their bigger rivals to help you secure financing.
Credit Union: Credit union business loans have increased every year since the recession, making them appealing, particularly to small business owners. Building on their community model and their strong investment in their local area, credit unions engage local business owners with lower rates and longer repayment terms. Check ‘em out!
Consider Viable Alternatives to Bank Loans
As you consider your loan options, take a look at less-than-traditional venues, too. Three alternatives — institutional lenders, factor lending, and government loans — offer different advantages to SBA loans and conventional lending practices.
Institutional Lenders: According to Rohit Arora, the CEO of Bizz2Credit, institutional lenders, which are comprised of hedge funds, insurance companies, family funds and other non-bank institutions are increasingly competitive sources of loans. Unlike traditional banks, their loan approval ratings hover around 60%, in part because their investment in technology allows alternative lenders to minimize risk and speed up an otherwise slow process.
Factor Lending: If you deal with customers slow to pay their bills, factoring is a simple option to strengthen your cashflow. You sell your invoices to a factoring company, which after subtracting a fee, sends you the money within 24 to 48 hours.
Factoring firms also handle the collections process, leaving you to focus on your work rather than track invoices and follow-up with the customers. Their fees rest a few percentage points above traditional loans, so make sure that you’re willing to let go of some of your revenue for a more consistent cash-flow.
Government Loans and Grants: Both state and federal governments offer loans to eligible small business owners. Business USA’s website offers a clear path to discerning which loans you may be eligible for based on your background, location, and sector. You can also check out government grants, which unlike loans, don't need to be paid back.
Your Next Steps
Once you've mulled over these tips and tricks, sit down with an expert for a more detailed look into your options. A consultant at a small business development center in your state can guide you toward the best choices. When you show up for your appointment, bring your documents with you and present your business with professionalism and a bit of polish. A first impression can go a long way!