General Loan Information
Loans are a time-tested way of raising capital for your business. We would love to tell you that it is as easy as going to the bank and asking for money, but as you probably know by now it is quite the opposite. Some banks, however, have streamlined the application process to make it easy for you to access capital. The requirements for each bank are different, but in general, you can abide by the following (the below is true for SBA and non-SBA loans):
Good Credit Score. This is a very important factor in the consideration for a loan, but not the only one. If your score is not good right now, work on improving it.
Collateral (security for loan). In some cases a good credit score and down payment are enough to secure a loan. However depending on the amount of the loan, you may also have to offer collateral. You can use your house, retirement plan, or any other major possession as collateral if the bank requires security in the event you cannot pay back the loan.
The relevant experience of the business owner is also an important factor for the loan package. Banks feel more confident in giving out a loan to business owners who have relevant experience in the business that they are starting, such as a dentist opening a private practice.
Owner’s Investment. If you are forming a new business, be prepared to invest a certain portion of the start-up costs personally. Lenders rarely finance 100% of the business. They will expect you to raise 20 to 40% of the investment yourself. The higher your personal investment in the business, the better the loan application looks to the lender.
Good Business Concept or Plan. A good business concept that is believable and relatively conservative. Lenders are conservative organizations that do not take large risks.
Capacity to Manage and Pay. The business should be able to generate enough cash to pay back the loan installments.
Collateral and Guarantees. The lender will look at how the loan can be secured. He or she will give importance to the individual’s personal financial statement and see if the loan can be secured against personal and business assets.
When applying for a loan and writing a business plan, make sure your financial projections are correct. Do your research. Know your business. It is surprising to see the number of entrepreneurs who do not pay enough attention to the financial aspect of the business. Even though it may not be much fun, paying close attention to the financial details will determine whether your business will survive.
Although most banks want to help entrepreneurs fund and expand their businesses, their primary responsibility is to make money from the loans and minimize their risk. Just because you have a great idea and are motivated to see it through, you may not get a loan. In fact, banks are very careful with innovation; they are conservative institutions that lend to tried-and-true businesses.
Whenever you submit your business proposal, always ask yourself, "What would make this a good deal for the bank? What assurances (aside from my good credit and great idea) can I give to the bank so it will get its money back plus interest?"
For more financing information proceed to the next section. SBA Loans
