Business owners generally have two concerns when trying to get a bank loan or line of credit. Either they can’t qualify or they face scrutiny beyond belief.
Wouldn’t it be great to save time and shorten the process?
You can if you know what banks want and if you treat a banker like you would a prospective customer – by qualifying the banker by asking three key questions.
Before exploring this topic, here are three miscellaneous thoughts:
— Firstly, it’s worth noting I don’t recommend trying to borrow money for marketing or ongoing operations. And don’t borrow against your credit cards or mortgage. You’re asking for trouble, especially if you’re a young business.
— Secondly, avoid alternate sources of funding unless you’re guaranteed a very low interest rate. Crowdfunding is popular but remember you’d give away autonomy. A traditional bank loan is best for your credit reputation, and will enhance your future credit worthiness.
— Thirdly, never open an e-mail from an alleged lender offering you a loan. Those are “phishing” scams in attempts to get your vital financial information.
Generally, to qualify for a loan you must be able to provide positive answers to 10 questions:
1. Consistent cash flow
You must be able to show you have a solid revenue stream and stable cash flow. That generally means operating a credible business and showing a successful three-year track record.
2. Sufficient collateral
It’s possible to get a loan or line of credit without collateral, if can you show a pattern of success and own a home. But for many entrepreneurs, banks want collateral to loan money.
3. Debt-to-income ratio
If you’ve got debt or have other outstanding loans, banks won’t come through with a loan. Multiple requests for loans from other sources on your credit report is a red flag to banks.
A bank is a place that will lend you money if you can prove that you don’t need it.
4. Customer base
You should have a diverse portfolio of customers. Banks look with a jaundiced eye at businesses that have a small base of customers. If you’re a tavern or entertainment business owner, you face long odds for a loan.
5. Minimal credit history
Banks, of course, have credit-score standards. You must have a reasonable history of obtaining credit and paying it off. Most often, banks require a credit score above 700.
If your credit report shows errors, know that you have options.
6. Personal guarantee
A bank will want you to guarantee in-writing that you’ll be responsible for the loan and that you’ll pay it off.
7. Insufficient time in business
Banks look for business credibility. That means showing them a significant track record laced with profits.
8. Economic conditions
If the economy is uncertain, the banker will be concerned. The banker wants you to be able to pay in a timely fashion. Therefore, you must have a stellar record of profits and low costs to reassure the banker.
9. Authoritative management
You must personally have a stellar business reputation for honest and expert management of your business. That’s why effective self-marketing matters.
10. Questionable sector prospects
If your sector or industry has well-known problems or is in a pattern of decline, you’re wasting your time in seeking a bank loan.
After you study the questions and determine you’ll qualify for a loan, you’ll still face a ton of scrutiny when you apply.
“The income tax has made more liars out of the American people than golf has.”
Got your documents ready? To shorten the process, treat a banker as you would a prospective customer by asking three key questions:
— Who makes the decision?
When you approach a banker, ask who will make the decision. Does the loan officer or branch manager make the decision or will it be a committee in another location?
The more people involved in the decision process means additional questions and often an inefficient use of your time.
— What information is required?
Normally, you’ll be asked for your personal and business information. At the minimum, the banker will request your previous years of financials and a current financial statement. They often prefer recent tax returns.
If you’re asking for a large loan, they’ll probably want a business plan. A real estate loan will necessitate a current appraisal. A delay in responding with documents will be a red flag for a banker. So respond ASAP.
— How do they want the information?
Learn what will be accepted verbally, and ask if they want either hard or digital copies.
From the Coach’s Corner, here’s more information:
Tips to Get the Lowest-cost Small Business Loan — Small business owners are facing unnecessary financial risks because they increasingly seek debt consolidation and loan refinancing as the result of high interest rates and onerous fees, according to a small-business lender. Here’s what to do.
Debt Consolidation Will Sink You without These 6 Tips — If you’re not careful in your debt-consolidation plan to bundle your debts for a lower interest rate and minimum payments, you might get into more financial problems. Here are six precautions.
When there’s No Cash, 8 Tips to Organically Grow Your Business — Organically growing a business is lot like organic farming. Organic farmers pay attention to the signs of nature as a planting guide. They use rich sources of organic matter to build and maintain soil fertility. If you’re like many entrepreneurs, it probably makes sense to grow organically. You might not have another choice.
You Can Creatively Manage Your Cash Flow 7 Ways — If you’re taking the pulse of your business, of course, the first thing to consider is your cash flow. If your cash flow is poor, you feel poor because you can’t pay the bills nor can you use money for what you’d like to do. Your image can also suffer with vendors or with customers, if you don’t manage your cash flow.
Management — 5 Frequent Causes of Cost Overruns and Failures — Extensive research shows how and why corporate projects result in cost overruns and failures. The academic study is entitled, ‘Yes Men’ Are Killing Corporate Projects. The research reported rampant misreporting of project statuses at all levels of the companies. The errant information is prompted from cultural predispositions to career aspirations.
“Those who are careless in trifles give a precedent for remissness in important duties.”
-Plutarch – Life of Æmilius Paulus