Securing a loan for your small business requires more than simply filling out papers and asking for money. Today’s savvy small business owner must be prepared.
1. Understand What Type of Projects the Lender will Fund
“Understanding what a banker looks for is crucial for the small business owner,” said Allen Weaver, advisor to the Lake County Small Business Development Center. “Different banks have different lending criteria, and if you are rejected from one, don’t be discouraged. Most importantly, learn how to prepare your business to obtain capital. Learn what the lender is looking for when you ask for the loan.”
Competition for loan dollars is fierce because many loans are granted for niche businesses with specialized lines of business.
So, much like a grade school “show and tell,” small business owners should be prepared to show the business banker the fiscal health of your businesses while telling the story about your business.
2. Prepare Your Business For Its “Close-up”
Before you talk to the banker, it is important to establish a relationship. Get to know the lending institution and the banker. Lenders will –and many require, face-to-face meetings to get to know you and your business. Lenders may also come to your business to better understand your business and how you operate.
Lenders rely on you to accurately describe your business in a way that a they will understand. Oftentimes, a business overview is included in the business plan. However, if your business plan doesn’t, no need to worry.
Typically, lenders like to know:
- How you do business. For example, is your business online, mail-order, or retail based?
- What is your product? Or perhaps you offer a service. There is much to consider from the lender about their risk for a product that may not have the propensity to be successful. For instance, production of fidget gadgets was great a decade ago, but quite passe now.
- Are you looking to expand your business by hiring more talent or adding more equipment?
- How do you market your goods, product, or service?
- Who do you market your product to?
- Is there an allocated budget for the “Four Ps” of marketing?
The lender is assessing the demand of your product in the market in which you sell. All of this begins to show the lender if your business is in a position to repay the loan. After all, the loan MUST be repaid. Remember, the lender must have the paper-trail to support inking the “approved” stamp on your loan.
Additionally, lenders look at your background and experience in business. Have you managed companies prior to this business? Does your financial experience support how to use the loan dollars properly? Will the funds be managed by you or delegated to one of your employees, such as a manager or controller?
Speaking of finance, business owners will need to accurately show financial projections and cash flow for the company with realistic figures, not by presumption. To do so, knowing your competition and what they charge for the same or similar products will help support your loan request. You will also need to know the true cost to produce your product. Oftentimes, small business owners focus on profit, however, knowing what your expenses are helps to drive long-term decisions, especially from a lending perspective.
3. Putting It All Together
A business loan request is asking for an investment in your business. And, the reality is business owners may get rejected by the lender. “The funding request may not fit that particular lender’s policy. It may be outside of their risk balance or there may be insufficient collateral, “ added Weaver.
“Sometimes a small business owner will have to meet with one, two, or even three different lenders before gaining approval. But if conventional lending resources seem insurmountable, do know there are alternative funding sources, such as the Small Business Administration (SBA), which the lender will help to coordinate for you.” Weaver and the Small Business Development Center can help business owners prepare for their lender meeting, and above all, show business owners how to package the ‘ask’ and advise as to which loan to pursue when securing a loan for your small business.
Learn more. Listen to Securing a loan for your small business with Allen Weaver on the Biz Chat Ohio podcast.
This blog is made possible by Lakeland Community College and the Ohio Small Business Development Center.
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If you have a business question or an idea for an amazing guest or business topic, email the Small Business Development Center at firstname.lastname@example.org.