In past columns we have addressed the issue of investment "angels" and other alternative financing sources, however for most minority and small businesses the primary source of money to build or expand is a bank. Commercial banks are a viable resource for your next business loan, especially in these very competitive times when most banks have extensive small business programs. If you qualify for a loan, bank financing can provide funds at attractive interest rates without the loss of control that many other funding alternatives entail. This does not mean that getting a bank loan is easy. To get a loan requires finding the right banker and then putting forth a proposal that meets the bank loan committee's requirements.
To qualify for most bank loans, at a minimum, you should be prepared to do the following:
Develop a high-quality business plan.
This is a prerequisite for any type of funding. Your business plan should include well-developed financial projections and explain exactly how much financing is needed, what it is needed for, and how it will be repaid. The plan should also describe the business opportunity and the qualifications of the management team. Even if that team is just you - make sure your experience, knowledge and determination show through. The quality of management is a key consideration in any financing decision. Also, please be sure to have the plan reviewed by an objective outside party before presenting it to a banker. Your wife, friends and even your current vendors, are not objective third parties. Be prepared to hear the real deal about how your plan comes across to a professional - it may sting, but it may be exactly what you need to succeed.
Develop a track record.
A business plan is much more credible if a record of success backs it up. Show that your business has been on a growth track, has met its goals, and has a good credit record. If it's a start up, show a relationship to your management team's accomplishments in previous ventures. Quality here counts more than quantity, so be accurate and complete.
Find the right banker.
Many experts advise cultivating banking relationships well before you need to ask for a loan. Different banks tend to focus on different types of businesses and loans. Even individual bankers within the same bank have different areas of expertise and different personalities. It's crucial to find a banker with whom you can develop a good relationship. Your CPA, attorney, and other advisors can help identify bankers that would potentially be interested in your business. Once you have a list of several, interview them to assess their level of interest and compatibility. As part of the process, ask for their advice. They generally love to give it, and their input can be very valuable in tailoring your plan to give it the best chance for success.
Be able to show that you have significant equity.
As a general rule, bankers do not want to finance businesses in which the owner doesn't have a major personal investment. Unless the business has a long successful track record, they will want to see that you, your partners, family members, or other associates have made a major investment in the business before they make theirs.
Identify collateral or guarantees.
Collateral is a particularly challenging problem for service businesses. They often don't have the type of assets that manufacturers do to secure the loan. You may need to be prepared to pledge some personal assets.
Consider an SBA loan.
If you can't qualify for a conventional bank loan, consider applying for an SBA guaranteed loan. The SBA loan process has been streamlined and is probably easier and quicker than you think. There are certain banks that specialize in SBA loans and participate in special SBA programs, such as the Community Express program. These institutes know the ins and outs and can expedite processing. We will cover the SBA process and options in more detail in future columns.
If you have a solid plan, don't give up if you've been turned down. Keep networking and making contacts until you find the right match.
If you are rejected for a loan the most important step to take is to ask why. The answers will help you prepare for the next time or may even show what you need to do to qualify for the same bank. The rejection is not necessarily a bad thing if you can pinpoint what you need to improve in your presentation, plan or documentation.