One of the things I have enjoyed most about my ongoing partnership with Bank of America is getting to know the business of small business banking and lending so much better. Generally speaking, I think it is an area that a lot of small business people misunderstand, and this was certainly true for me when I started my first business. When I first started out, I initially used the Friends & Family Investment plan. Now I know that there are better, more professional options available.
Chief among the financial misunderstandings amongst most small business people is what it actually takes to get a bank loan for their business. I think the process intimidates many entrepreneurs.
What I know now that I didn’t know then is that banks (like my friends at Bank of America) want to lend you money. That is their business, after all. It is our job therefore to make their job easier.
1. Create a relationship with your banker: This was the big eye-opener for me. Before you ever go into the bank with your loan package, it would behoove you to have created a relationship with a small business banker beforehand. They are there, ready to help you prepare the strongest loan package you can. But that can only happen if you meet with them beforehand.
2. Figure out how much you need: This needs to be thought through very carefully. It’s like Goldilocks’ porridge – you don’t want to ask for too little (because that would result in a capital shortage quickly) and you don’t want to ask for too much (because the bank would question your judgment and business plan). You need to ask for an amount that is just right. Your banker can help you figure this out.
You also want to be sure that you are seeking funds for the right reasons. Getting a loan because you are consistently not turning a profit is a bad reason. Getting a loan to finance a necessary piece of equipment is a good reason.
3. Get your personal credit in order: Not all loans require a personal guarantee on the part of the principal, but many do, so you need to be sure that your credit score is in line with what lenders are looking for. The business’ financials need to be in order as well. Lenders will look at:
- Your credit score: Above 700 is desired.
- Debt to income ratio: How much do you owe versus how much do you make?
- Credit history: Do you pay debts back on time and in full?
- Length of time in business: The longer the better.
- Cash flow: More is better.
4. Prepare your loan package: Your package will include financials, projections, business plan, leases and relevant contracts, and personal financial information. The relationship you previously created with your small business banker can help here too as you can make your introductory letter more personal and he or she will already know you and your business.
5. Submit and wait: Depending upon the size of the loan, the bank’s decision may come in a few days or it may be a few weeks.
6. Repay: The secret to getting an even bigger and better loan (better rates and terms) is paying your loan back in full and on time. Paying it back early is even better. Do that and you will have established your business as not only credit-worthy, but also the type of business with a bank wants to do more business with.
About Steve Strauss
Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest,The Small Business Bible, now out in a completely updated third edition. You can listen to his weekly podcast, Small Business Success, visit his new website TheSelfEmployed, and follow him on Twitter. © Steven D. Strauss.
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