Tips for getting a small business loan.
By Lori Johnston
There's no easy button for getting a business loan. A lender will dig into your business and personal bank accounts, tax returns and credit scores, and you will need to open up about your company’s financial projections and funding needs.
While that’s enough to cause anyone to consider maxing out credit cards or accepting funding from good-hearted friends and family, would-be borrowers can feel encouraged that consultants and bankers are seeing an increase in loan activity. The lending environment is becoming less restrictive than it was in the past couple years, says Jim Parrish, a consultant with the Florida Small Business Development Center at USF in Tampa, which in January started partnering with the USF Sarasota-Manatee College of Business. Two certified business consultants and a part-time consultant now provide free consulting to existing and emerging local businesses.
Consider these six steps when you seek a small business loan.
1. MAKE YOUR CASE IN WRITING.
Don’t enter a financial institution empty-handed. Provide written information about your company’s mission, background and experience, product/service, financial projections and marketing plan.
“So many people just go into a bank and say, ‘Look, I need X amount of dollars to get my business going.’ The banker is going to look at them and say, ‘OK, let’s evaluate the risks and let’s see where you’re going. What are your projections and how are you going to pay me?’” says Andy Fox, president of Bradenton-based Fox Business Group LLC.
Before going to the bank, answer these questions:
• How much money do I need?
• What am I going to be using it for?
• How long do I need to pay it back?
Another reason to make a persuasive case in writing, says Parrish: The decision-maker may not be located at that bank branch, or even in the same state.
2. BE AWARE OF THE BARRIERS FOR START-UPS.
Start-up businesses have a more difficult time finding financing because banks typically look for a track record of at least two to three years, Fox says. That’s not to say you can’t do it. In addition to a written business plan, some savvy borrowers with start-ups also offer credentials and references, says Gerhard Toth, Regions Bank vice president and business banking sales manager, Sarasota-Manatee.
3. OPEN UP YOUR BOOKS.
Existing businesses need to show their strength in terms of revenues, diversified client base, and accounts receivable and expenses. Be prepared to let the lender know if you have the cash flow to adapt if something negative occurs in your industry
4. CONSIDER EVERY OPTION.
Businesses typically look first at traditional, or conventional, bank lending and U.S. Small Business Administration loans, which give financial institutions a guarantee that the government will pay if the business defaults on the loan.
SBA’s most popular program is the 7(a) Loan Program for real estate, equipment and working capital; another option is its CDC/504 Loan Program for major fixed assets such as real estate or equipment.
Short-term loans and revolving lines of credit for working capital also are available (sba.gov/loanprograms provides information about qualifications and terms). Business owners typically need to be willing to put up collateral for SBA loans.
Financing isn’t out of reach if you don’t qualify for an SBA or bank loan, due to poor credit scores, for example. Parrish says other sources such as accounts receivable financing and a purchase order loan are available, although they can come with higher fees and be more expensive. Venture capital and crowdfunding are other, less common, options.
5. GIVE YOURSELF SOME CREDIT.
You want to first approach a bank where you have existing business and/or a personal relationship, but if that institution denies your loan request, don’t think all lenders are going to turn you down. “That’s a false assumption,” Parrish says.
6. AVOID RED FLAGS.
Check your FICO score to determine your credit levels before a lender checks it (you can pull your score for free annually from each of the three major credit reporting bureaus, Equifax, Experia and Trans Union). Red flags also include financial projections that seem too good to be true, such as 300 percent growth in the first year. “There’s just no way,” Toth says.