January 2012

Keys to getting a small business loan

Before a start-up company can begin producing revenue, it often needs an infusion of cash that exceeds owner contributions. Even long-established firms sometimes must borrow to purchase inventory, buy real estate, expand operations, meet payroll, or keep the lights on. When business owners turn to banks and other financial institutions for help, some are offered loans; others walk away empty handed.

Why the difference? If you've read the financial press in recent years, you know that many banks have been burned. Some with lax underwriting practices extended credit to companies that went bankrupt. Even some strong institutions failed when large loans weren't repaid. Those that survived may be licking their wounds and rethinking their lending practices. As a result, your bank may be reticent to extend credit to a company that lacks a proven track record or that's otherwise perceived as a bad risk.

But even if your bank is willing to extend credit, don't sabotage your efforts by failing to prepare adequately. Increase your chances of getting a business loan by following these suggestions:

Show that you have a detailed business plan. Putting your ideas, projections, and assumptions on paper can uncover gaps in your logic and flaws in your research. Your business plan should lay out market research, financial projections, start-up costs (if applicable), and assumptions. Show how you're going to spend every dollar of the loan proceeds to generate revenue. Consider the plan from the other side of the table. Would you lend money to a company that lacks a credible strategy?

Show that you're capable. Lenders must have confidence in you. Convince them. Show that the combination of your management team's education, skills, and work ethic will lead to success. To demonstrate your ability to repay the loan, you may be asked to share your credit report and tax returns. If you've struggled to meet prior obligations, be ready with explanations, including evidence of extenuating circumstances.

Show that you're invested. Lenders often look kindly on business partners who have pumped a substantial amount of their own savings into a company. Before applying for a business loan, plan to document that at least 25% of the firm's equity has come from the personal assets of its owners and investors. From a lender's perspective, such an investment demonstrates a commitment to see the company through hard times — and to pay back the loan.

January 2012

Keys to getting a small business loan

Business tip archives