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Written by David Gass
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Start Your Funding Search with Traditional Lending Institutions
Getting a business loan seems like a daunting task for many small business owners but with good preparation and research, a solid business plan, and the ability to convince a skeptical loan officer that your business will be a resounding success, you should have no trouble getting a business loan.
Begin Your Search with Research
The place to start when thinking about getting a business loan is at the very beginning. Research all of the areas for information on business loans including your neighborhood bank or credit union. Check in with business colleagues or friends about their experiences getting a business loan. You may also want to pop into the local office of the Small Business Administration, an agency of the federal government that has been established to assist businesses with getting started and financed.
Establish a Plan
Once you have done your research you can then start preparing for getting a business loan. This will include drafting a formal business plan with projected income and expenses, any assets or liabilities that the business may have, a marketing strategy that details how you will build business and attract clients and customers, and how you plan to deal with all the other factors in your business operating climate.
Review Your Credit Score
One more thing you need to do before visiting your bank or other lending institution is to request and review your personal credit score. You might as well do it before the bank does because they will almost certainly request access to this information before you get a business loan. Review your credit history and make sure that it is accurate and up-to-date. If there any errors or omissions you should request corrections in writing and keep a copy to show the bank when you visit them.
Make an Appointment
The next step to getting a business loan is to request an appointment with a bank or credit union of your choice to discuss your business financing options. Come prepared to sell the loans officer on the feasibility of your business plan and then wait for the inevitable list of questions and other conditions that the lending institution may request.
These questions and conditions might include the provision of a personal guarantee to secure the business loan or they might ask for references from the business community who would speak on behalf of your character and business acumen. The bank or credit union might also ask you to provide upfront assets or collateral in order for you to qualify for a business loan, or they might ask you to clear up any outstanding credit in your personal finance file.
Sooner or later, if you have a good plan and a somewhat good credit rating, you will be on your way to getting a business loan. Then all you have to do is make good on your promise to run a successful and profitable business.
Obtaining a Business Loan with Bad Credit
Getting a business loan with bad credit is very difficult but not impossible. If you are turned down for a business loan because of bad credit, it is first of all very important to know why the bank refused your request and then to find out what you can do to restore your credit.
A bad credit rating can result from any number of factors. Unfortunately, when a bank sees your request for a business loan with bad credit they don’t look behind the rating to see the explanation. The most common reasons for bad credit are defaulting on a loan or mortgage, missing or late payments on a regular basis, loss of employment, or lengthy periods without work or income. If you can provide the bank or other lending institution with a good reason as to why this occurred in the past, they might reconsider your business loan.
The major reason a bank or credit union may refuse a business loan is because they feel your debt-to-equity ratio is too high. This means that they have determined that your debt has exceeded their normal standards of three-to-one debt versus equity and, in their view, your debt is simply too high to provide additional credit. If you can find a way to reduce your debt-to-credit ratio below this threshold, the bank might have another look at your application.
The final reason that a lending institution might balk at a business loan is if you do not have collateral to back the loan. Collateral is some asset that you already own that you are prepared to sign over temporarily to the bank while the loan is in effect. If you pay back the loan, they release this collateral back to you. If you default on the loan they may seize this collateral and pay it off to pay for any remaining balance on the business loan.
Even if you have a poor credit history it still may be possible for you to arrange a business loan. It will probably cost you more in interest and fees, but other lending institutions like savings and loans and finance companies may be able to meet your request. Shop around and you may find a good deal.
In the long term you will have to find a way to restore or rehabilitate your poor credit rating. There are a number of ways to do this and information on this is available from your local bank or credit union. HBM
David Gass is President of Business Credit Services, Inc. His company publishes a weekly e-newsletter on Starting and Growing a Small Business at http://www.smallbusinessconsulting.com. You can sign up for their free newsletter by visiting http://www.smallbusinessconsulting.com.
Previously published in the February 2007 issue of HOME BUSINESS® Magazine, an international publication for the growing and dynamic home-based market. Available on newsstands, in bookstores and chain stores, and via subscriptions ($15.00 for 1 year, six issues). Visit www.homebusinessmag.com
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