— August 26, 2017
Getting a business up and running normally takes a significant amount of money. Usually, it’s more than an entrepreneur can comfortably afford by themselves. In such cases, the standard course of action is to take out a loan. Banks represent a common way for you to get a small business loan—assuming that you’re approved for one.
Bank loans can be convenient in one highly important regard: namely, that they don’t want a stake in your company. A bank isn’t concerned with owning a portion of your business—they just want to know that they’re going to get their money back with interest. That said, it’s important to make sure that you don’t fall behind on your payments once you take out a bank loan.
Otherwise, you could find yourself subjected to a whole host of fairly restrictive loan covenants. As any borrower with significant business experience will tell you though, the average banker isn’t intent on seeing you fall behind on your payment plan. Those covenants are there to incentivize you so that you can pay back your loan to the bank along with a reasonable return. That’s all any banker really wants.
That said, bankers want to know that there’s a good chance your business will succeed before they approve a loan. To make that determination, they’ll look for certain qualities or features in your business plan. Make sure your plan meets the right criteria, and you can boost your chances of approval significantly. Here’s what to focus on:
Money Talks: Cash Flow and Collateral
If a bank sees that you have a substantial and properly-documented stream of incoming revenue, they’ll have more confidence in your ability to make back enough to repay them. Don’t settle for future projections though. You should try to collect at least three years’ worth of income statements, cash flow statements, and balance sheets—along with the corresponding tax returns. However, those of you who are just starting your entrepreneurial careers may be able to offer collateral instead.
Collateral can be anything, but in most cases it’s a portion of your home equity. Be advised: the bank doesn’t really want to own your home. They want to see that you have something at stake, so that they can trust you to invest your time and energy in making your business work.
However, that doesn’t mean they won’t seize your house if it’s the only option you give them. Many people who are uncomfortable taking that kind of risk prefer to look for lenders who do not require collateral at all.
Human Resources: Strong People, Soft Skills and Bright Ideas
Maybe you’re not in an excellent position to take on more debt at the moment. That’s where a co-signer can strengthen your application. A co-signer can lend their credit to your venture, offering more protection to the bank. You should also have a detailed marketing plan and concrete ideas for how to manage your business. Banks aren’t interested in spending money on someone who is just learning how to actualize a concept. They want to fund fully-realized ventures that only need a little extra capital to put their plans in action. Put simply: before you ask for money, you should know exactly what you plan to use it for.
Organization is your best friend when you’re trying to get a working capital loan, or of any other kind. You’ll need to prove that you have the assets to pay back your lender, whether you offer collateral through a bank loan or look elsewhere for a lower-risk option. You’ll also want to have the clout of reputable people behind you, along with documented strategies for marketing and running your business once you acquire the capital.
Follow the steps above, and you should find that loan approval is far easier than you anticipated.