By Garrett Sutton, Esq.
A lot of borrowers are unaware of what it takes to get a business loan. They think that if they have been a regular customer of that bank, the bank should give them a loan; or if they show up with a passion about their business, the bankers will share that enthusiasm.
You will make a great impression if you know what the lender wants. Commonly, a lender is looking for the following:
- Cash Flow and Profits: Business tax returns that show two years of profitable operating history, or enough historical profits to cover your personal expenses and make a loan payment.
- Bank Accounts: Bank statements that show well-managed personal and business checking accounts—that is, no overdraft, transfers between accounts that follow sound business practices and healthy balances for business operations and household expenses.
- Credit History: Good credit history with no defaults or bankruptcies.
- Collateral: Equity in real estate, large equipment or vehicles.
- Equity: Business owner has 25% of total project costs in cash or direct investment to contribute to the project.
- Uses of funds: Funds needed to expand or evolve an already successful business.
- Industry Experience, Planning and Research: A solid business plan based on industry standards.
- Supporting Documentation: Location, job creation potential, type of business and any information that enhances the business’s chances for success.
If a borrower has all of the above, they will be considered low risk and have more loan options. When one or more of the above is shaky, such as a history of overdrafts, unexplained deposits and transfers in the bank accounts, the funds are needed for business start-up or refinancing, or the business owner has little or no industry experience, then the loan application is considered to have more risk. For more information please see my book Finance Your Own Business: Get on the Financial Fast Track.