Despite the proliferation of alternative lenders nowadays, bank loans remain one of the most popular choices for small business owners looking to finance their companies. Compared to other funding methods, bank loans offer larger loan amounts, longer repayment terms, and lower interest rates. Getting a bank loan is not a walk in the park, though, so we’ve listed 5 tips to help entrepreneurs interested in getting a bank loan.
1. Prepare early
Getting a bank loan is not easy for an entrepreneur. You’re going to need a lot of time, effort, and patience. The time between submitting your application and waiting for the decision is already long but the time to get the requirements ready may be even longer.
Ideally, the best time to start preparing for a bank loan is when you don’t need one yet. Steering your business in the right direction early on will make securing financing a lot smoother and painless down the line.
The bank is going to be interested in your financial numbers and documentation, so hiring an accountant or investing in a good accounting software can help you create an organized, professional presentation that clearly and accurately shows the financial health of your business.
Also, preparing early will give you ample time to improve an anemic credit score or increase your debt service coverage ratio (DSCR), if needed.
2. Have an unbiased assessment of your risk profile
Before submitting a bank loan application, step back and assess yourself and your business honestly. If you were the loan officer, would you approve that application? As a depositor, would you be okay with your bank risking your money on that entrepreneur? If the answer is no, why? What is giving you cause for concern?
Once you identify the weak point(s) of your application, you can come up with ways to make your application better. What collateral can you offer? How can you boost your credit score? Should you wait a little longer before trying to secure a bank loan?
Poor credit is a common reason why loan applicants get denied. If you’re in the same boat, there are steps you can take to raise your personal and business credit scores, such as correcting inaccurate information on your record, paying your bills on time, paying off existing debts, and resolving late payments and tax liens.
3. Have a clear idea of what you need
Have a clear idea of how much you need, what type of loan you want, and how you intend to use the funds. Being specific with those things will help ensure that the amount you are borrowing is sufficient to serve your needs, but not too much that you would be paying interest on excess money.
Also, being specific will make the bank more confident in your ability to use the funds wisely and it will better show how the loan will grow your business. So instead of just stating that you need $200,000 in working capital, you can say that you need $50,000 for inventory, $20,000 for marketing, $50,000 for wages, and $80,000 for adding another store to your establishment.
In addition to this, listing out your needs can also help you qualify for other types of loans. For example, the SBA offers several different categories of loans to small businesses that might not be able to get financing elsewhere. Aldora Capital has a great breakdown of the different purposes these different SBA loans can be had for.
4. Make sure you can afford the loan
Bank loans are cheaper than other kinds of small business loans but you may need a cash down payment—usually around 20% of the amount. This is something that surprises many borrowers.
Also, as you already know, the last thing you want is to get stuck with a loan that you can’t pay, so before you send in your application, make sure that you are making enough to afford a loan.
Look at the cash flow, not the revenue. Your income should be at least 1.25x your total expenses (including the loan repayment). So if your company earns $10,000 each month and pays expenses worth $7,000, then you can comfortably repay at most $1,000 in loan repayments per month.
Lastly, prepare a repayment plan and set aside a cash reserve for loan payments from the very beginning. This can help protect you from failing to repay your small business loans and losing your personal assets.
5. Keep your documents in order
Update your financial, tax, and accounting records regularly so you can have them on hand when you meet with the bank officer to discuss your loan application. Having these documents ready will speed up the loan process and help the loan officer discuss the best options for you.
The Bottom Line
Getting a bank loan for your company is neither easy nor fast. It takes a lot of time and energy but an early preparation and an honest assessment of where you stand as a borrower can make the process smoother.