By Jay Thompson
Need a bank loan for your small business?
Business Bitz
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Getting a loan for your small business has never been easy and for most small business owners it seems harder now than ever.
Put yourself in the lenders position, you want to borrow their money and they are in the business of lending money, so it should be easy right? Well, the first thing you need to realize is all loans start at no. It’s not that they don’t want to lend to you, they want to get paid back. If they give you a dollar, how will you repay that dollar with interest? If you have a plan that shows your business will make enough money to handle the debt payments, that is a plus. If you have a track record of paying your debts on time as agreed, that’s another plus. If you have enough collateral to secure the loan, that is yet another plus. The more pluses you have, the better your odds for success. Here are some tips to help turn the odds in your favor.
1. Before you even start the process look at your credit report. A large percentage of credit reports have errors on them that will negatively affect the score. Some have items listed twice showing the individual obligated to more than actually owed, others have incorrect amounts or balances shown for accounts that have been paid off and some even have accounts listed that were never opened and belong to someone else. Most of these items are easily corrected and, if possible, corrections should be made before you apply with your lender. You can go to http://www.annualcreditreport.com for a free copy of your reports.
2. A business plan with financial projections is a must. You must be specific on the amount you are applying for. Don’t say “I’d like to borrow as much as I can get.” If you do, you will be finished before you get started. Make a request for a specific amount, then, demonstrate through your business plan how you will use this money. Show how it will increase or support your business and how you will pay it back. Most lenders look for a minimum of a 1.25 to 1 debt service coverage. That means if your loan payment is a $1.00 you will need a minimum of a $1.25 of cash flow to cover it. Obviously, more is better.
3. The loan package must be complete. The package will consist of financial information related to the business’s and owner’s current credit situation, earnings, expenses, assets and liabilities. This will include both business and personal tax returns, as well as, financial statements. Any gaps or items left out of the mix will greatly decrease the odds for success.
4. Where should you apply? There is a difference between large lenders and smaller regional or community lenders. The larger lenders will have a more standardized loan process and may prove to be relatively fast for applicants that have an established relationship with them. Also, for smaller dollar amounts (under $100,000) you might be better served through large banks. Community or regionl bank lenders are more relationship-oriented and tend to customize the loan process to the applicant, but they are usually less likely to work with small dollar amounts.
Remember, bankers don’t like risk. If you follow these steps, do everything correctly and are still rejected, don’t give up. Try to get the reason for the rejection and see if there is something you might do to correct it. If not, at least you will be in a better position to apply again somewhere else.
The SBDC can assist with the application process and has information regarding a variety of loan programs that you or your traditional lender may have over looked. Feel free to give us a call!
Jay Thompson is a Business Consultant with the CSU Bakersfield Small Business Development Center. The CSUB SBDC provides premium, one on one, no cost consulting to small business owners in Kern, Inyo and Mono Counties. For more information visit their website at http://www.csub.edu/sbdc.
