An issue that has become quite vexing for many small business owners in recent years is finding the funding for their business, be it for a start-up or to fund growth. Between the Great Recession and the mortgage meltdown, financing dried up; not only was the home equity ATM turned off, but loans generally became harder to get.
But the good news is that there are all still sorts of ways these days to still get your dream funded.
Today, let’s look at how one gets a regular old bank loan, because, despite some common misperceptions, that is still the way most entrepreneurs fund their businesses. Now, is it a little more difficult than before? Sure. But that said, it is still quite doable. After all, what is the business of a bank? To lend money. They want to lend you money. It is your job therefore to make it easy for them to do so.
Here’s how: Getting a business loan will require that you jump through several hoops – properly and in order. You will need to have a lot of documentation prepared for the bank, and the bank will additionally look at your personal credit history, ability to collateralize the loan, business history, books (profit & loss statements, balance sheets, etc.), and more.
Because an element of risk is involved in every loan a bank makes, you need to help the bank understand that your loan’s risk is low. You can do that if you understand the “Four Cs” of credit. When a banker considers a business loan, it will analyze your application through this filter:
- Character. This relates to the integrity, reputation, and history of the borrower. In smaller community credit unions and banks, character is a significant factor, whereas in many big banks, your credit score matters much more. Character is determined by your payment history, credit profile, letters of reference, and so on.
- Capital. How much money do you need? The more money you seek, the tougher it will be to get.
- Capacity. What is your ability of to repay the loan? You will need to be able to show to the lender that you will be able to service the loan amount requested and that it will be repaid in full and on time. Requesting too much is not a good idea therefore.
- Collateral. Not all business bank loans require collateral, in fact, some are unsecured, but that is more the exception than the rule. Bankers like collateral, and there are all sorts of options you can use to secure a loan: A home or other real estate, inventory, machinery, even accounts receivable.
So, if you need a bank loan, think like a banker and understand these four concepts before you apply.