Business Loans

Guide to Applying for a Business Loan from a Bank

What banks need to see before they'll hand over the dough
By W. Eric Martin

Every business needs available funds to operate, whether you're paying for raw materials or expanding into new markets, but banks and other financial institutions won't just hand over money because you smile nice. You need to show the bank that your business is well-run and well use the funds to achieve your goals. By preparing yourself properly, you can:

1. Show the bank how the funds will be spent and what level of return you expect.
2. Prove that you're a trustworthy recipient who has good-standing in the community.
3. Lay the groundwork for future requests.

Action Steps

The best contacts and resources to help you get it done

Write a business plan You might already have a general business plan that covers everything from the initial store layout to eventual world domination, but the bank wants to see how its funds will improve your business.

I recommend:  Follow these five writing tips from SCORE (Service Corps of Retired Executives) for a business plan that includes everything a banker wants to see, with nothing extra that might be distracting.

Prepare your paperwork The bank will want to know how you're going to repay the loan, which means that you'll need to have your financial documents in order for review. The bank will also review these papers to see how well you've handled money in the past and whether you keep good records.

I recommend:  As this repayment analysis from business incubator Gaebler Ventures explains, you'll need to show personal and business tax returns, personal finance statements and cash flow records.

Know your loans Loans come in many different flavors so ask for the one that works best for you. (Your banker might have a different opinion, after reviewing your records, so take his or her advice under consideration.)

I recommend:  The basic types of loans are term loans (paid monthly), short-term loans (for a year or less), equipment financing, and open lines of credit (in which you take out money as needed up to a maximum amount per year). You can also borrow through Small Business Administration (SBA) loans at regular lending institutions.

Discuss dollars Once the banker feels that your business is a good loan candidate, you'll start to negotiate the details of the loan.

I recommend:  Ask the banker questions about all the topics related to the loan: the amount you'll receive (which isn't necessarily what you wanted), interest, repayment terms, loan fees, restrictions on the funds (such as being used for new equipment and not for labor costs), and your responsibilities as a borrower. Take notes and make sure you understand all of the agreement.

Apply online Ideally you'll apply for (and receive) a loan from a local banker since ties to the community will likely work in your favor. In case that's not possible, you can consider applying for a business loan through an online company.

I recommend:  BusinessWeek, for example, has an online loan application for currently operating businesses that takes only a couple of minutes to complete. The application will be sent to multiple loan suppliers.

Tips & Tactics

Helpful advice for making the most of this Guide

• Make an appointment with a loan officer in advance. Don't simply walk into the bank with a stack of documents.
• Approach local institutions first, particularly those with which you currently have accounts. Those banks already have access to your records, so they can possibly review your application more quickly.
• Don't ask for the moon. Banks often have limits (either dollar amounts or a percentage of your annual revenue) on the amount they'll lend a first-time applicant.