With all the emphasis on “angels” and alternative financing sources, you may overlook commercial banks as a viable resource for your next business loan. If you qualify for a loan, bank financing can provide funds at attractive interest rates without the loss of control that many other funding alternatives entail. Getting a bank loan means being able to find the right banker and then putting forth a proposal that meets the bank loan committee’s requirements. Follow these steps to find the money you need:
- Develop a high-quality business plan. This is a prerequisite for any type of funding. Your business plan should include well-developed financial projections and explain exactly how much financing is needed, what it is needed for, and how it will be repaid. The plan should also describe the business opportunity and the qualifications of the management team. The quality of management is a key consideration in any financing decision. Be sure to have the plan reviewed by an objective outside party before presenting it to a banker.
- Develop a track record. A business plan is much more credible if it’s backed up by a record of success. Show that your business has been on a growth track, has met its goals, and has a good credit record. If it’s a start up business, show a relationship to your management team’s accomplishments in previous ventures.
- Find the right banker. Many experts advise cultivating banking relationships well before you need to ask for a loan. It’s crucial to find a banker with whom you can develop a good relationship. Your CPA, attorney, and other advisers can help identify bankers that would potentially be interested in your business. Different banks tend to focus on different types of businesses and loans. Even individual bankers within the same bank have different areas of expertise and different personalities. Once you have a list of several, interview them to assess their level of interest and compatibility. As part of the process, ask for their advice. They generally love to give it, and their input can be very valuable in tailoring your plan to give it the best chance for success.
- Be able to show that you have significant equity. As a general rule, bankers do not want to finance businesses in which the owner doesn’t have a major personal investment. Unless the business has a long, successful track record, they will want to see that you, your partners, family members, or other associates have made a major investment in the business before they make theirs.
- Identify collateral or guarantees. Collateral is a particularly challenging problem for service businesses. They often don’t have the type of assets that manufacturers do to secure the loan. You may need to be prepared to pledge some personal assets.
- Consider an SBA loan. If you can’t qualify for a conventional bank loan, consider applying for an SBA guaranteed loan. The SBA loan process has been streamlined and is probably easier and quicker than you think. There are certain banks that specialize in SBA loans and participate in special SBA programs, such as the Community Express program. These institutions know the ins and outs and can expedite processing.
If you have a solid plan, don’t give up if you’ve been turned down. Keep networking and making contacts until you find the right match. Your tax professionals can help you put together your next financing plan, and can offer assistance in working through the steps necessary to get the loan you need.
