Business Article - Getting a Loan from Your Bank
Banks are one of the many resources that are available to those who need money to either maintain an existing business or start a new one. There are several different loan types available for business purposes but how can a person guarantee that they can qualify for any of those options? To ensure success, one must be prepared for it. Therefore, in order to be able to attain one of these loans, one must know what the minimal qualifications are that need to be met.
There are standards in everything. Standards keep the world turning. They ensure that people will continue to grow and change and they ensure that not every business that claims to be a business will get the proper funding. The banks have set these standards to insure themselves against fraudulent companies, businesses that cannot afford to make the loan payment and businesses that go bankrupt within the first year. Income requirements, collateral, the right attitude, and the right information can almost guarantee that a loan will be approved. This is why finding out what standards need to be met allows the business owner the time to prepare to meet them.
There are some questions that must be considered when looking at a business loan as an option for funding business costs or for the use of a business start up. Questions such as: Does the business really need this money or is there another, cheaper option? It is imperative that all options be researched and well thought out before attempting to obtain a loan. Interest rates are not favorable for large amounts and repayment could be difficult for a new or slow moving business. Get the loan information from a loan officer. Look at the payments over time and see what exactly the business would have to net in order to meet those payments as well as the cost of materials, labor, insurance, utilities, advertisement and any other business related expense. Does this still leave a profit? If so, a loan may be something that could help your business.
What assets can be used as collateral? This is a question that the banker will most definitely ask. Often times a banker will not consider a loan applicant credit worthy for a business loan if they do not possess any assets that can be liquidated to cover a debt; especially when the applicant is trying to start a business. A home, vehicle, stocks, bonds, and land can all be used as collateral on a business loan, but remember to only borrow an amount that you can comfortably afford to repay. It would be devastating to not only have a business that fails but to also lose a home and vehicle. Really think about the money that is needed. Do the research and make educated decisions. Writing out a plan of action is a good idea to get the general ideas on paper before thoroughly researching the costs.
What exactly do you plan to use this loan for? This is another question that the bank will require an answer to. They do not lend money in large amounts “just because” and they will laugh in anyone’s face if that is the answer that they receive. What is needed is a drawn up list of the amounts that will be used to purchase various items or services that a business needs to help it achieve its full potential. If the plan is to move into a new, more expensive building, list it. If the business needs a larger amount of stock to answer to the demand for the product, list it. If there are any repairs that need to be made, any equipment that needs to be purchased, any employees that need to be hired, or any services that are required by the business, by all means, list it. This is the information that the bank wants to see. It must be detailed and well worded. Do not scribble a bunch of numbers and items down on a sheet of notebook paper and lay it in front of the loan officer. Present them with a well thought out, detailed, and calculated business plan.
A business plan does not consist wholly of the business needs. It also shows the costs to currently run the business or the amount to get the business started, the projected costs over time, the current income of the business, the potential income of the business, and the goals that the business plans to achieve. This is all information that the bank will want to see. It is important to show the bank that this is a responsible business with important and realistic goals. If a banker sees this information, that is exactly what they will think; this business really has their act together.
A business’s current situation is another important factor in the determination of the loan. If the business is stable or growing it is more probable that the loan will be granted with better funding terms. If the business is failing or has not even been started, chances are slim that funding terms will be optimal or even acceptable.
Another important thing to consider is the business management. If the business is currently failing or in decline, chances are that there are issues with the management. A bank will not sink money into a business if it is being improperly managed. In order for a business owner to overcome this hurdle, one must put an additional cost on the list that was discussed above. Save a slot for the increase in salary for new hire of management or even for training of management team. This lets the bank know that the problem is being addressed. With an increase in salary offerings, a higher quality individual may consider this position and with proper training, existing managers can live up to the expectations of the banker and the owner.
What kind of financial background does the business owner or potential business owner have? The banks want to know this so that they can calculate their risk. Even though this loan is for the business and in the name of the business, the owner is still the one ultimately responsible for making the loan payments to the bank. If the owner of the business has a history of skipping bill payments or not making them at all, it can be a detrimental fact to the loan decision. Paying on time greatly increases a person’s credit score and having a low amount of revolving debt assures that there are adequate funds available to make those payments in full and on time. This is why it is so important to properly manage credit.
Realistic ideas of customer bases and markets that the business will focus on are also helpful to have in hand when asking for a loan. It shows the banker that the business owner has done their homework. If a business is responsible enough to take the time and effort to gather all of the necessary information to set the business on the path to great success, it seems fairly unreasonable to believe that that information would not be used by the business if a loan was granted. The bank thinks like this; evaluating each applicant for signs of risk. If a business does not show any of those signs, the chances of becoming approved increase exponentially.
A business is only as good as its employees. Keep the management and other employees in check with training and constructive criticism. If that does not work, consider hiring a new staff that is more customer oriented and more responsive to the training methods. Many business owners hate being “the bad guy” but if the staff is ruining the business it is time to cut the losses. Let them go ruin someone else’s business. The point is that any small business cannot afford to make mistakes. Whether those mistakes are in judgment, finance, or customer service it cannot be acceptable. To make it to the top of the business ladder there are a lot of rungs to climb and only the strongest can get there.
Regardless of the situation of any given business, it is always smart to weigh the options. There are many loan sources available and choosing the right one is completely up to the person who applies. The most important thing to remember is repayment. If there is not adequate income to make the payment to the bank, the business and any assets put up against the loan could be lost. Make payments on time, every time. Always keep extra copies of the business plan available and update it at least yearly. This ensures that your business is always looking to the future.
This information should aid any business owner or future business owner in obtaining a business loan. The actual achievement of becoming approved for that loan is solely dependant upon the person. This does not mean that everyone who does this will be approved but it does mean that by following the criteria above, a person can greatly increase their chances for obtaining a loan approval.