Following the 2008 global financial crisis, many financial institutions have tightened credit, making it much harder for individuals and small businesses to take out loans. However, as the economy begins showing signs of recovery and consumer confidence increases, many small business owners are looking to banks for funding once again.
How To Prepare
Before you begin to approach any financial institution regarding a loan, it is important to do your research ahead of time. Wherever possible, it is a good idea to approach a bank that has special knowledge of your particular industry.
A common misconception is that it is better to borrow from a large bank than a smaller local one. However, this is not necessarily the case. Smaller banks will be able to offer a more intimate and personalized business relationship. They are more likely to remember your specific needs as a client. In addition, there is a better possibility that they will have heard of your business model and have a better understanding of local economic trends.
In addition, be sure to gather all of the proper documentation you need beforehand. Failure to do so may result in you appearing as a disorganized applicant. It is important that the lending institution feels confident about your ability to be profitable enough to pay off the loan.
Finally, make sure that you are prepared when you go in for your loan application interview. Be sure to thoroughly review all of your company's finances, and be prepared to discuss them in great detail. It is a good idea to put a package together that discusses your business model and your estimated monthly profits and expenses.
Their Perspective
Before they decide whether or not to approve you for a loan, the bank will always do a very thorough check on your credit history. This means that if you have ever defaulted on any of your debt obligations or have made late payments on bills, this may negatively affect you when you apply for a loan.
Another important thing that will determine whether or not you are granted the loan is what type of collateral you possess to secure the loan. This will basically minimize the bank's risk if you ever default on your payments. When this happens, they can just take the asset that you put up as collateral. This basically turns the loan into a secured loan.
The bank will also likely ask for a detailed report containing expected cash flows and business projections. If your business has been around for some time, they may ask to see a cash flow history to help determine whether or not your projection is realistic.
Before applying for a small business loan, it is always wise to eliminate any existing debt that you may have. If you carry a large debt burden, you will not be viewed as a suitable candidate for a loan because there will always be concerns that you will be unable to meet your interest payments.
