by Meredith Wood
With the tremendous growth of alternative lending products on the market, there are a variety of options for small business owners to choose from. But for those that qualify, traditional bank loans continue to be the most attractive choice, as they remain the lowest-cost product on the market.
But how do you know if you’ll qualify for a bank loan? You’ll never know unless you apply, but you want to make sure that both you and your business have strong financials before applying. Outside of that, the best thing you can do is prepare a killer loan application.
If you’re ready to take the plunge, follow these steps to make your bank loan application the best it can be.
Choose the right bank and loan product
Should you apply with the bank where you currently hold your business accounts, with another local community bank or with a large corporate establishment?
Will you apply for a traditional term loan, a business line of credit, or a U.S. Small Business Administration backed 7(a) loan?
There’s no way around it: You’ll have to do your research to determine the best fit for your business’s needs and qualifications.
Generally speaking, it is almost always best to start with the bank with whom you already have a relationship. However, keep in mind that community banks are a lot more small-business-friendly than large banks. If you have a choice, start small.
In terms of the best product, this might be a better question for your banker. For example, a line of credit could be the right choice if you don’t necessarily need a lump sum right now, but you’d like to have a financial security blanket.
When you’ve chosen a bank and product, take a look at the specific application(s) you’ll be completing to determine whether there is any unique information needed.
Refine your business plan
Even if you’ve been in business for years, you should have a working document that reflects why you’re in business, how your business makes money, your understanding of your market and competition and your most relevant financials.
Having a solid business plan in writing shows that you are serious about your business, that you understand your industry and that you more likely have a true understanding of what it will take to maintain your business and pay back your small business loan.
While business loans aren’t necessarily won or lost based on your business plan, having a complete and accurate plan in place gives loan officers a chance to get to know your business better.
If you haven’t already put together a stellar business plan, do your loan application and your business as a whole a big favor by completing this important step before you go any further.
Prepare to disclose your personal finances
No matter how long you’ve been in business, if you’re considered a “small” business, the bank’s inquiry likely won’t be limited to your business’s financials. For most bank loans, you’ll likely be asked to offer collateral, such as your house or other property, or to offer a personal guarantee on some or all of the loan amount.
And keep in mind that if you’re in a partnership or a corporation with multiple owners, this stipulation will apply to anyone with more than a 20 percent stake in the company.
The bank will take a look at your personal credit history and may try to do some digging into other personal financial information, such as your past tax returns. How much you’re comfortable disclosing is up to you. But choosing to be open with your personal financials could give you a leg up in your quest to secure a bank loan for your business.
Clean up your credit reports
Banks - more so than any other type of lender - still weigh your credit report and rating more heavily than any other factor in considering your eligibility for a business loan.
Ideally, bank lenders are looking for a credit score above 700, though borrowers with scores in the 650-700 range may still have options available from bank lenders. If your score is below 700, it’s best if your revenues are high and you have good collateral to offer. If your personal credit score is below 650, a bank loan may be tough to come by.
To maintain stellar credit, it’s critical that you always, always pay bills on time - both personally and for your business. Even one late payment can have a significant negative impact on your credit rating.
Stay on top of your personal credit by pulling your credit reports from all three of the major reporting agencies - TransUnion, Experian, and Equifax - every six months or so. Check for any false or erroneous information, and if you see an error, contact the credit bureau in writing to correct it.
Gather your business financials
Bank loan applications are notoriously the most complex of all funding applications small business owners will come across, and this is especially true in the area of financial disclosures. In addition to your personal financial information, your bank loan officer will expect ample data to back up your assertion that your business will be in a good position to pay back your loan.
Before you begin your bank loan application, gather the following documents related to your business:
- Articles of incorporation
- Business licenses & registration
- Franchise agreement (if your business is a franchise)
- Past two years of business tax returns (state and federal)
- Past two years and YTD balance sheets and profit & loss statements
- Copies of vendor, customer, and other third party contracts
Banks may end up asking for more documents than this (or fewer), but coming to the table with these documents will help the application process move faster.
Offer a repayment strategy
Traditional banks are redoubling their efforts to provide financing to small business owners, and they do genuinely want to see you succeed. But ultimately, the job of each and every bank loan officer is to determine how likely you are to consistently and completely make on-time payments on principal plus interest for your borrowing amount, each and every payment period, for the life of your loan.
Prove your long-term viability and help your application stand apart from the pack by preparing a forecasting document to demonstrate your repayment strategy. Talk to a business mentor in your field and use past income statements to come up with a realistic revenue forecast and cash flow projections for the next one to three years of your business. This way, you do the work for them of proving that you’ll have enough cash on hand after you’ve paid other expenses to also make your loan payments.
Complete the application
Congratulations! If you’ve completed the steps above, the process of actually completing your loan application should be quick and painless. You’ll be able to confidently answer questions based on information you already have at your disposal, and you’ll know that information represents the best and most accurate possible version of your and your company’s financial story. Everything else simply comes down to paperwork and a waiting game.
And if you don’t receive an immediate answer on your bank loan application, don’t stress: These applications can often involve some of the longest waiting times in the financing business - we’re talking months! So be patient. If you don’t hear anything and grow concerned, reach out to your loan officer politely and cheerfully for an update.
In the meantime, try to relax knowing you’ve done everything you can to prepare the best possible loan application. The rest is out of your hands!
Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace forsmall business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. She is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness and many more.