In today’s economic climate, obtaining a small business loan, and even a simple bridge loan to make payroll, can be a monumental task. While I can’t show you ways to “beat the system”, I can show you how you can stack the deck in your favor by doing some up-front preparation. Getting the proper documents in order prior to beginning your search for the best lending option is a good place to begin for sure.
Be advised that whether you’re seeking a loan from a traditional lending institution like a big bank, or even a less traditional route, such as a friend or a family member, each will likely have similar expectations. You should be prepared to meet and exceed those expectations before you walk in the door with your request.
I’ll touch more on all of this in just a minute, but let’s talk a bit about lending options first…
Most small businesses start with a loan, whether to secure operating capital for a business start-up or to finance an expansion. And there are ways to get the money you need faster and easier than you might think. It’s important to know that big banks may not always be able to give you what you need. Smaller, more specialized lending firms can often serve your needs just as well as the big banks. And while family and friends might appear to be a great option, you might want to avoid this path and the ferocious family fight that could erupt should things fall short of your expectations or you need to close down your business at some point.
Let’s look at the big bank option for a moment. On May 5, 2010, Bank of America (BOA) (www.bankofamerica.com) announced that it loaned $19.4 billion to small- and medium-sized businesses in the first quarter of 2010, which was nearly $3 billion more than during the same period last year. BOA loaned $81.4 billion to small- and medium-sized businesses in 2009, and the company has pledged to increase lending to those businesses by $5 billion in 2010.
"We are committed to an additional $5 billion in lending because small- and medium-sized businesses are crucial jobs providers in our economy," said Brian T. Moynihan, president and chief executive officer, BOA. "We are making every good loan we can make."
David Darnell, president of Global Commercial Banking, said, "We are pleased that we have been able to help small- and medium-sized businesses through increased lending. What's been most instructive to us, though, is the message from clients that access to credit is not the biggest issue they are facing. What they are telling us – and what other business organizations have confirmed – is that lagging demand for their products and services continues to be their greatest challenge."
That’s all nice. But despite these claims, many entrepreneurs are finding the requirements needed to sign on the dotted line and obtain a small business loan from BOA or other large banks are more rigorous than they have been in years. Nowadays, it can even be tough to find a lending officer in banks of that size to listen to your business proposal. And secured lending requirements often preclude many from obtaining the funds they need to achieve their goals.
My advice is to turn to smaller and more specialized firms that are making loans to qualified small business owners. Whether you need money to tide your business over or just so it can grow and thrive, these institutions are committed to helping you if they can.
With small businesses facing ever-increasing financing uncertainties, the problem-solving expertise of companies like AEX Commercial Financing Group can be especially valuable for example.
Another source to consider is America One, especially if you’re seeking an unsecured personal or small business loan. America One can be a very helpful resource in that they understand how frustrating and challenging today’s economic circumstances can impact your ability to secure money.
With all this said, and now that I’ve given you some possible avenues to explore should you need a small business loan, you’ll need to get your document ducks in a row before you even think about making your first call or sending out your first feeler e-mail.
Try to think like the lender who will be sitting across from you as you make your proposal…but do it before you sit down!
If a friend was asking you for a loan of $1,000 just to tide them over until their next pay day, you’d be a fool to not ask questions before you make your decision to fork over the cash, right? Is this guy honest? Will he really pay me back when he says he will? Is this a temporary financial challenge he’s having, or is this a pattern? What’s the likelihood he can bail himself out of this jam he’s in over time so I can get my money back? Well, a lender is no different than you would be in that situation, and you should be prepared to make your pitch so that all those questions are answered thoroughly. Remember, the goal is to for you to exceed expectations.
Part of meeting and exceeding expectations is having a well conceived business plan. The plan you create is all you’ve got when it comes to getting a loan; it will make or break you as the lender is assessing the risk of working with you. It represents not only whether or not you’ve done your homework, but that you understand your business as well as your market sector. Demonstrating thoroughness in these areas is a key indicator of your likelihood for success. More importantly, it tells the lender what you plan to do with the money that they are potentially going to give you.
As part of your business plan, it is critical that you map out your cash flow projections in great detail. This will allow the potential lender to sink their teeth into real financial data needed to assess the true risk they might incur by loaning you money. If you are an established business and you have a current business plan, make sure it is up to date in relation and incorporates how this new loan will help your business. Again, it’s important to articulate very clearly what it is you plan to spend the money on and when it will be spent.
The next step will involve providing a detailed statement of your personal financial status. This will include all of your personal assets and debts, and paints an overall picture to the potential lender of your pecuniary situation.
In almost all cases, whether you own an existing business or are a start-up, you’ll need the following documents:
- Your business plan, with ALL CRITICAL elements well executed and complete
- Past tax returns, both personal and business
- Your credit report… Although it is unnecessary for you to have it with you, since any potential lender can easily pull it, you MUST be completely familiar with your own credit report!
A bit more on your credit score: If you are seeking a loan from a friend or family member, your word may be your only bond, so make sure you can keep it. However, if you are seeking a loan from any lending institution, not being familiar with your credit score in advance can kill your loan in a heartbeat, especially if you have a less than desirable score. It doesn’t matter if you’ve created the next blockbuster business opportunity or if your business plan is flawless; none of that will matter if your credit score is a disaster. The good news is that it actually costs very little for you to find out what your score is in advance, especially if you use such services as Credit Check Total, where you can obtain your 3 in 1 credit report along with your combined credit score quickly and easily. You can also search your firm’s credit score in some cases by going to Dunn & Bradstreet, if you have a file with them.
Now that you understand all the prep work and documents you will need to get a small business loan request in order, how do you actually persuade the lender to give you that loan?
We will cover that subject in our next blog post.