If you are working on starting your own small business, one of the biggest issues you are most likely facing is financing. Regardless of what kind of business you are starting, it takes money to make the transition from a dream to an actual business. Although there are different ways to obtain funds for your new business venture (such as angel investors or venture capitalist financing), at one point or another, the majority of small businesses requirea loan from a bank to keep them alive and growing.
In a perfect world, any small business owner with a great idea and strong work ethic would be able to obtain a loan to help their business. Unfortunately, the reality is that it takes more than these two elements for a small business to receive a loan. Because banks are always concerned about minimizing the amount of risk involved in making a loan (especially given the current economic climate), they take multiple factors into account when they are determining whether or not to approve a loan for a small business owner.
Although there is not a template that every bank follows when they are evaluating a small business loan application, there are definitely major factors that almost every lending source will take into consideration. To maximize your chances of being approved for a loan, it’s important to fully understand what a bank will be looking at during their evaluation.
Business Plan: When it comes to your business plan, accuracy and details carry a lot of weight. If you can use your business plan to show exactly what all of your loan will be used for, along with showing the true impact that this will have on your business, you will have a much better chance of getting approved for a loan than someone who simply throws together a set of generalized estimates.
Invest Capital: By investing your own assets into your small business, you are showing the bank that you are confident that your business is going to succeed. Because investing your own capital demonstrates that you are taking the first step, many banks will be willing to follow by providing you with a loan.
Offer Collateral: Along the same lines as investing capital, putting up collateral shows the bank that you are serious about your business, and that they can be confident that their loan will be repaid. While many small business owners think that offering collateral puts them in a situation where the bank is going to come after their assets as soon as they miss a payment, in reality, this is simply a sign of trust, and the bank is going to be more interested in working with you than coming after any of your assets.
Build a Relationship: If you do get approved for a business loan, it’s very important for you to focus on building a strong relationship with your bank. Even if you only receive a small loan, properly managing it can lead to receiving a larger loan from your bank down the road. When it comes to building a quality relationship with your bank, honesty can go a long way. For example, if you know you’re going to miss a payment, be honest with your bank about what’s going on, and explain to them how you plan to fix this situation.