You can't start or grow your business without funding. Unfortunately, applying for and getting a business loan isn't a fast or stress-free experience.
Applying for a loan is one of the most crucial steps for a small business owner. To give yourself the best chance of getting approved, follow these tips for negotiating and ultimately getting a business loan.
1. Do your homework and go to the right banks.
Alex Espinosa, SBA lending consultant and founder of BOLD Lender, recommends researching banks before applying for a loan. Like doctors, banks have specialties. You should find banks that are able to help you and not waste time at banks that can't.
"Some banks are good at restaurant loans and some are good at gas station loans, but many lenders reject those categories," said Espinosa. “I would start by looking up every bank headquartered in my county and begin investigating them, starting with the smallest. A good place to start is on the FDIC website."
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BJ Lackland, CEO of Lighter Capital, suggests trying to seek capital from multiple sources. "In any negotiation, it helps to have options," he told Business News Daily.
2. Know the terminology.
Bankers and lenders won't take you seriously if it seems like you're unprepared or not sure what you're talking about.
"Speaking the same language as your lender demonstrates that you understand the process and your responsibilities, increasing your lender's confidence in you," said Paola Garcia, a small business advisor at Excelsior Growth Fund. "This can also help you spot warning signs that a potential lender may not have the experience you need or may demonstrate predatory lending behaviors – either of which can result in a loan that's poorly structured, with repayment terms that jeopardize your business's cash flow."
Before you apply for a loan, here are some terms you should familiarize yourself with.
Balloon payment: "[This is] the unpaid balance due at the end of a term loan for loan types that don't fully amortize over the term of the loan," said Gennady Litvin, associate at Moshes Law. "The balloon payment is due at the end of the loan to pay the balance in full."
Default: Litvin defined this as "failure to make the agreed-upon periodic payments on a loan."
Financial covenants: "These are financial guardrails within which you need to operate your business," Lackland said. "If you go outside these, you'll be in default under the loan and the lender can demand immediate repayment." Financial covenants may include a minimum cash balance in your bank account, a minimum level of profitability and asset coverage of cash-flow ratios.
Loan-to-value ratio: "[This is] the ratio of a loan to the value of the purchased asset," Litvin said. "It's one of the metrics used to evaluate the risk on a potential loan."
Personal guarantee: "If you personally guarantee a loan, that means not only is your business on the line, your personal assets are also at risk," said Lackland. "The capital source could come after your house … Try to avoid a PG as much as possible."
3. Be prepared.
"Preparing for a business loan is like dressing for your wedding," said Espinosa. "You want to look as attractive as possible and present yourself like a good risk."
While you need to speak the part, so does your paperwork. Espinosa recommends getting copies of your credit report to identify any negative items and try to repair or remove them. "Have a letter of explanation prepared for any negative items that remain."
You should also have your tax returns for the past three years, three years of fiscal year-end financial statements, and year-to-date financial statements.
"You should prepare a personal financial statement listing your income, assets and liabilities," Espinosa said. "Have copies of up to six months of bank statements, recent broker and retirement account statements, copies of your life insurance policy and statement, any trust information, and any recent appraisals you have had done."
Before you arrive at the bank, make sure you and your paperwork are organized and neat. "Neatness, grammar, spelling and organization counts," said Espinosa. "Sloppy requests don't even get read and are often rejected immediately."
For more information on what you need for a small business loan application, read this Business News Daily guide.