When a small business needs capital, a small business loan from a bank comes first to mind. Banks want to lend to companies that have a record of profitable operations, that generate cash flow sufficient to repay the loan, and that have enough collateral or assets to secure the loan. A clean credit record for both the company and the principals of the company is mandatory; few late payments, and no bankruptcies or foreclosures.
Most start up companies do not quality for traditional bank financing unless the founder has the personal net worth and income to guarantee the loan. The loan then is a really a personal loan to the founder rather than a business loan.
Check with the bank that you have your business accounts with for the person who handles commercial or business loans. You will be asked to provide financial statements for both you and your company for the last several years as well as tax returns. You may also be asked to provide documentation as to the accounts you have, both personal and business. A business plan will be required and you will most likely have to complete the bank s own loan package.
You will have to personally guarantee the business loan, which means any and all assets you have will be pledged to pay off the loan if your business doesn t. If you live in a community property state, your spouse must also personally guarantee the loan.
First Tip: The acquisition of a bank loan takes time, as with any form of financing. Begin the process of finding a loan several months, at least, in advance of when your company needs the capital.
Second Tip: In looking for a bank loan, you are really approaching a vendor (the bank) to see if you want to buy his product (money). Don t approach the situation like a starving peasant who desperately needs food (funds) to stay alive. The bank needs you or it has no revenue (except of course for the exorbitant amount of interest it earns on VISA cards).
Cash (flow) Is King
Before approaching a banker about a loan, it is imperative to prepare a detailed cash flow forecast to determine how much capital you need, and how and when the loan will be repaid. To the banker, the cash flow forecasts and historical financial statements are extremely critical. The venture capitalist has lofty goals for his relationship with your company to earn a fantastic rate of return over a variable length of time. He may cash out of the business in 3 years, maybe 5, but in any case, he wants to create great wealth out of his participation in your company. The banker has more modest goals to get his money back with a specified rate of interest but he is much more concerned about timing getting the interest and principal back from you at prearranged points in time and in protecting his original investment. The banker, too, responds to forecasts that are realistic and containing detailed assumptions. Just as the venture capitalist tires of reading Business Plans with ridiculous or unsubstantiated projections, the banker appreciates well thought out numbers grounded in reality.
Tell The Banker About Your Business
You also must prepare a Business Plan type profile on your company to enable the banker to better understand your business. The Business Plan is your marketing tool again, just as it was with the venture capitalist. It also shows the banker your ability to plan and organize your company skills that will enhance your ability to pay him back.
Follow these tips and you ll be successful in obtaining a small business loan.
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