Tips on Bagging a Bank Loan
Whether it’s for a down payment on a new house, or to start up a new business, finding the money to get started is one of the most difficult obstacles new owners face. The most likely (and easiest) sources of capital are your family, friends and your own savings. But institutional sources may be a wiser option. That said, without a previous track record, securing a first time bank loan can be tough. Banks often turn down first time loans because of the risk factors, and the costs of servicing small accounts. But that doesn’t mean it can’t be done. Here are ten top tips that you can take to the bank:
1. Banks Must Make Loans - Without loans, banks would not stay in business; loans are their bread and butter. So although banks often demand stiff collateral requirements for first loans, you shouldn’t be apprehensive about asking for one.
2. Research Lenders - Zero in on appropriate targets. Look for a bank that is familiar with your loan type, industry, and geographic locale and has done business with people like you or companies like yours. Don't be afraid to ask competitors and other local, related businesses for referrals. Seek out banks that give loans of the size and type you want. Some banks lend on a conventional basis (lending money without government support), while some banks participate in government programs (direct government funds or loan guarantees).
3. Prepare for the Meeting – Once you have identified a suitable institution, call ahead to find out the name of the bank's resident small business or mortgages specialist, and set up an appointment to meet in person. Ask for a detailed description of all the materials he or she will want to review. Typically, these will include your cover letter, completed loan application, business and personal tax returns, financial statements, and projections. In addition to the financial documentation, you'll need to bring along a two to three page executive summary that details what you will use the money for and how you plan to pay it back. Include any materials that speak to your reputation or your standing in the community. If you’re after a business loan, bring promotional materials about your business, such as brochures, ads, articles, press releases, etc. Before you meet with a lender, prepare a two to four minute presentation. Anticipate their questions. A confident and thoroughly prepared borrower is four times more likely to have his or her loan approved than a borrower who does not know the answer to some of the basic questions.
4. The Banker’s Basics – Bankers will ask you: How much money do you need? How long do you need it for? Be prepared to go into detail about what you will do with the money and why you or your business is low-risk. When and how you will repay for it? Convince the banker of the long-term profitability of your business and your ability to repay the loan. What will you do if you do not get the loan?
5. Image Matters - Present yourself as an entrepreneur who can and will repay the loan. If possible, get a referral from a successful entrepreneur; bankers tend to deal more favorably with those who were referred to them by their best customers. Dress in a professional manner for the interview. Type all your loan documents; handwritten documents look unprofessional. This is a business transaction, so treat it as such. A confident attitude will enhance your chances of getting the loan, so do not be apologetic or negative.
6. Keep It Real - Broad, unsubstantiated statements should be avoided in your loan application. The lender can easily check many of the facts on your application. If you cannot support statements with solid data, then don't make them. It is best to keep projections, assets lists and collateral statements on the conservative side.
7. Don’t Push It – When the meeting wraps, ask the loan officer when you can expect the bank to make a decision, but don’t push too much. Doing so might result in a rejection. All you can do to ensure a speedy decision is to make sure that your application is complete.
8. Embrace Risk – Failure to discuss the risks is a red flag for loans officers. For instance, there is no business without risk, and if you don’t discuss it bankers will assume that you haven't thought about it. They want to know if you have planned for the major risks and how you intend to manage worst case scenarios.
9. If at First You Don’t Succeed… - Keep trying one lender after another until you get your loan. If applying for a loan on your own is just too overwhelming, you might want to contact a local SBA Small Business Development Center, which provides coaching and support to entrepreneurs for free. Or for a fee, you could work with a loan broker who could use his or her contacts to negotiate a loan on your behalf.
10. The First is the Toughest – Bear in mind that the first loan is usually the hardest to get. In general, bankers prefer to lend money to borrowers who have borrowed at least once and have paid back at least one loan on time. They are not venture capitalists that make high-risk loans regardless of the profit prospects of the business. Bankers prefer to lend to low-risk, low profit ventures.