“I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. 26 times I’ve been trusted to take the game winning shot and missed. I’ve failed over and over and over again in my life and that is why I succeed.” — Michael Jordan.
Owning a small business is a lot like sitting in the back of the log at Disneyland’s Splash Mountain. You’re going to experience plenty of twists and turns, and you can’t avoid getting periodically soaked. You’re also going to have a lot of fun along the way.
No matter what kind of small business you have or dream about starting, you’re going to need access to capital. With the average American having about $6,000 in liquid savings, most simply cannot finance the needs of a small business entirely out of their own resources.
Furthermore, even if it were possible to exclusively use one’s own funds, the majority of business advisers would counsel against doing so. A mixture of debt and equity has a greater chance to create healthier, more sustainable growth than either all cash or all debt financing.
Thus, you will probably need to work with a commercial bank to obtain the necessary capital. How does one successfully receive a small business loan?
Write a Business Plan
Whether you’re a start-up or just in a growth phase, you’ll need a business plan. Not only does a business plan serve as a blueprint for the anticipated course of your small business over the next 1-3 years, but the lender will use it to help figure out whether or not they are willing to make you a loan.
There are plenty of free templates online, such as the ones provided by the Service Corps of Retired Executives (SCORE). You don’t need to hire someone to do it; the lender will appreciate a simple, straightforward plan you create yourself. However, if you find it difficult to do, head to your local SCORE office or a nearby Small Business Development Center (SBDC) and enlist their assistance. The SBA partly funds these offices, and most of their services are free. They will help you with projections of your small business’ growth and in organizing your presentation. They will also have suggestions as to which lenders to talk to.
Choose Your Lender Wisely
Once you have your business plan in hand, the next step is to pick a lender that appears proficient in small business lending. The banks most likely to understand small business lending are community banks. Finding a good one may not be as easy as you’d think, because almost every bank smaller than Bank of America or Wells Fargo claims to not only be a community bank, but relentlessly touts their own small business lending programs.
Don’t listen to the marketing pablum; do your own investigation. An excellent litmus test of a bank’s commitment to small business lending is the U.S. Small Business Administration. Go online to see if a list of the top SBA lenders in your local area is available. If not, contact your local SBA office and ask them to send it to you. SBA personnel are very helpful and will gladly provide you the information you seek. They might even recommend a bank or two as well — just ask them.
When you get the list, study it closely. Look for a bank that does a large number of loans, not necessarily a large dollar amount. Generally speaking, the greater the number of loans, the more committed the bank is to small business lending in general. Select a few banks that look like they fit the bill, then check them out, both online and in person.
Meet With the Lenders, and Be Prepared
Whether it’s just one or several banks you talk to, employ the Boy Scout motto and be prepared. The banker is going to ask you a series of questions centered around your business plan and your loan request in general. Know your plan inside and out, because if you don’t understand it, they won’t buy into it.
The banker will ask you probing questions, such as the following:
- How did you come up with your numbers (projected sales, loan request, and any other figures cited in your plan)?
- Why do you believe you can successfully manage the small business, and what have you managed previously?
- Who do you see as your competition?
- What are some of the threats you see to the success of your small business?
- What are your long-range plans for the business?
They will also ask you about your personal finances, your credit, the collateral you have to offer, your current household income and other related questions. Have your tax returns at the ready for them to review, along with a personal financial statement.
Tips for Small Business Loan Approval
There is no magic bullet that will ensure the approval of your loan, but there are things that will help stack the odds in your favor:
- Don’t ask for 100% of the total cost. Although down payment requirements vary, most banks will want to see somewhere between 20-30% of the financing coming out of your pocket.
- Promote your management skills. If you can’t show you are able to run a business successfully, you will not get a small business loan from a bank — period.
- Clean up your credit. If it’s less than perfect, do what you can to restore your credit. At the very least, make sure your recent credit (last few years) is good.
- Have a secondary source of repayment. Lenders are very reluctant to lend to a start-up or young company where all of the principal’s personal income comes from (or if a start-up, is projected to come from) the business. Spousal salary, investment returns, rental property cash flow, savings or other similar streams of income can work as secondary sources.
- Offer collateral. The bank, in all likelihood, won’t make an unsecured loan. A combination of business and personal assets (real estate, titled vehicles, investments) greatly increases the odds of approval.
- Ask about an SBA loan. The SBA’s guaranty (50-90% of the loan) may add that extra ‘oomph’ the bank needs to get comfortable with the loan request.
- Have a plan ‘B’ at the ready. If the bank seems reluctant, be ready to make a counter-proposal: a smaller loan, adding collateral from an outside source such as a relative, adding another signor to the loan, or something else significant to sway things in your favor.
Remember: Banks Want to Make Loans
Banks make most of their income by lending money. However, with the economy only gradually emerging from the most significant economic downturn since the Great Depression, many lenders are still very careful about whom they lend money to, as the memory of all the businesses that went under during the recession is still fresh.
Find the right bank, be prepared and sell both yourself and your idea and you can get the capital you need to start or grow your small business. Following the above tips will improve your odds of being the next great American success story.
All that being said, small business lending is definitely hot right now. Perhaps former U. S. Congressman Bob Beauprez said it best: “In America, small business is a big deal.”