These days, with banks tossing nickels around like they’re manhole covers, getting a small business loan is no easy matter. Here are some tips from Robert Seiwert, an official with the American Bankers Association. Seiwert’s insights offer a glimpse into how bankers think these days, and can help you develop a beneficial relationship with a bank and prepare your business to get a loan.
1. Get to know the bankers at several local institutions. Before requesting a loan, find out which banks in your area make loans to firms like yours. Some banks specialize in business loans; others don’t. And some specialize in lending only to firms in certain industries. The best way to find out is to simply ask the bank, or check with other business owners. Consider how the financial crisis has affected credit availability in your community. Not all banks have been equally affected. Some are much more willing to make small business loans, says Seiwert.
2. Know how to briefly summarize your firm’s value proposition and your strategic plan for delivering on it. If you can’t clearly articulate why customers should do business with you and how you’ll effectively compete in your market, the chances of getting a loan are slim. Develop a business plan with three scenarios: Best case, most likely case, and worst case. You want the banker to understand all three since you’re asking for support through good times and bad. Also, be prepared to discuss in detail the assumptions behind those scenarios.
3. Think like a banker. Understand and be realistic about the risks of operating in your industry. Share your ideas on how to mitigate those risks. The bank will do a risk analysis anyway, so it’s important to help out. Most likely, you can provide a perspective that the banker hasn’t considered.
4. Develop at least two ways to repay the loan. Bankers look for primary and secondary loan repayment sources. “And for the sake of your business, you should, too,” notes Seiwert. You are in the best position of anyone to envision repayment alternatives, so be sure to discuss these options ahead of time. These might include pledging business or personal collateral or a loan guarantee by the firm’s owners, suppliers or customers. The more certainty that the banker has about your ability to make payments, the more likely it is you’ll get the loan plus the best interest rate.
5. Don’t ask for loans that should be funded with equity injections. Bankers aren’t paid to take equity risks; they get paid to make loans that will be repaid on time. If your needs are best met by, say, an angel investor who’ll provide capital in exchange for an equity stake in your business, that’s where you should look for money.
6. Anticipate their questions. For example, the bank will want to know how you plan to use the money. Banks often have policy restrictions on the types of loans they can make, and sometimes change those policies as market conditions change. They’ll also want to know how reliable your financial information is, what kind of reputation you have as a business owner, and why you really need to borrow. Some reasons to borrow are good, and some aren’t. A loan to help a profitable business keep growing is good. A loan to prop up a sinking business, or to support a business owner’s lifestyle, isn’t.
To find small business lenders, visit the small business loans section at Business.com.