A global slowing down of the economy means that less than a quarter of the requested loans are approved, and this is because banks can’t afford the default risk. Their evaluation methods are harsh, documentation takes painstakingly long, but protects them from unnecessary loses. You would do the same if you were the one lending the money.
Do you believe in your business?
The key to getting a loan approved is to demonstrate that you believe in your business so much that you are ready to sacrifice anything to make it work. Nobody will invest in you if you are unsure about the success potential and the ways to get there. Do your homework and be ready to describe why your idea is the best with proper documents and a bit of love.
Collateral- Show me the money
Believing in your business does not only mean passion and know-how. Banks and other financial institutions are looking for hard evidence that you stand your ground and help them hedge the risk of lending you the amount by putting collateral.
If your business is newly established, this could be your only chance of getting approved. Real estate, vehicles or investments work best. Sometimes the collateral can be your entire business, but you can also put a second mortgage on your home. However, note that this type of all-in approach is dangerous and makes entrepreneurs prone to burnout syndrome and stress-related health problems that could endanger the business and assets.
Do you have a plan?
Failing to plan is planning to fail. You should know precisely what amount of money you need, how you intend to spend every last dime of it and how you will pay it back. Of course, taking into consideration all the variables like the fluctuating economy, changes in interest rates and sudden shifts in market trends or a better competitor.
Think about how much debt you get yourself into by computing a rough estimate of your liability to income rate. Your lender will also do this and use it as a decisive factor in granting you the loan.
The business plan
Not only is a good idea to put everything on paper for yourself, but a solid business plan is a great backup document when negotiating with the bank. It shows that you are a seasoned business person with a thorough understanding of risk and you have considered potential pitfalls and had designed a plan to overcome them.
If your company is new on the market, the business plan is no longer just a nice to have, it becomes mandatory. Success, experience or partnership in a similar endeavor can tilt the scale in your favor and give you the bank’s trust.
If you dream of starting a company with the bank’s money, that is just not going to happen. It’s against banking corporate governance to do so since the risk is too high to estimate it accurately.
Are you trustworthy?
Speaking of trust, you need to produce some rigorous paperwork to show the bank that you are great at managing money and that you are not just going to waste the loan.
First, be prepared to show your personal FICO score. The reasoning behind this is straightforward: if you can’t properly manage your own budget, it is highly unlikely you will do better with the company’s. This is valid for each of the business partners. You should first aim to fix your score and get it above 680-700.
Business financial documents
Be ready to create a complete folder with your company’s financial details about all accounts, including:
- Bank accounts
- Investment accounts
- Credit cards.
These are necessary to track your spending, assets and determine the cash collateral.
Your lender will look closely at your cash-flows to determine your ability to repay the loan. They will ask for copies of your:
- accounts receivables to determine if you can cover the loan each month;
- accounts payables to assess if you won’t spend everything just to keep the business running;
- (audited) balance. Only larger companies are forced to get their documents audited, since this is a costly process.
This might seem like a lot of paperwork, and it could be discouraging, but without such measures, the economy risks a crisis like the last one from 2008.
Are you aware of the business environment?
It’s not enough to be financially healthy as a business now. To get a business loan, you need to be prepared for the future. One way of acknowledging risks is to buy insurance for your activities, especially if you are in more vulnerable sectors, like agriculture.
Secondly, you need to be sure that you have a clear focus, a well-defined target audience, and business proposition. Conversely, make sure that this is not a narrow niche that you would have a hard time finding clients in your area or you would have to compete fiercely with other companies just to make ends meet.
Where can you find the right financing?
As a business, you can go to a traditional bank, most likely the bank you already do business with and ask for a business loan. This makes the process easier since they already have most of your financial information available in their records.
Another way is to look for dedicated authorities, like the SBA. The offer a wide range of programs including:
- General small business loans 7(a)
- Disaster loans
- Microloan program
- Real-estate and equipment loans.
There are also new ways of financing your business. Non-bank lenders, regional lenders, and micro-lenders can help you get the money you need. Crowdfunding is also an increasingly popular option, especially for start-ups which can’t be financed by traditional loans since these companies don’t fulfill the minimal requirements.