Cracking the Code on Bank Loans – Here’s What You Should Know Before You Apply

By |2017-09-14T11:21:11-07:00April 8th, 2015|

Bank loans can be elusive for small businesses. According to recent statistics, only half of the small businesses surveyed nationwide received the bank loan they applied for. Why can it be so hard for businesses to find funding success with banks? There are many answers to that question, and the panel of experts we rounded up can explain it better than we can. In our Google+ Hangout on April 1, experts from Capital One, Wells Fargo and TD Bank explained what banks are looking for in loan candidates, what mistakes business owners usually make when applying for a loan, and when the best time to apply for a loan usually is. Read highlights from the hangout below:

Q: What are you looking for from your borrowers?

A: Passion and a plan.

Brian Smith, Capital One: “What we really look for are small businesses that come with a plan – they know exactly where they are, what they’re doing and where they’re going. They know their financials in and out. Some of them have a written business plan, some of them have their business plan in what they’re doing on a day-to-day basis, but really we’re looking for that small business owner that knows where he is, and where he’s going, and can communicate that. The more documentation that you can bring with you the better.” 

“When we’re talking to a small business owner, we want them to have that passion. We really want them to know the numbers, the people, the market, your competitors – these are things that we as bankers end up having to look into and evaluate as we’re looking into your loan. Knowing that you you know those parameters and those factors about your business even better than we do is a big deal.”

Smith said you as a small business owner need to understand:

  • Your financial situation
  • Your cash flow needs
  • The inter-workings of your business

Q: What Common Mistakes Do Business Owners Make Before And After the Loan Process?

A: Before: Not Presenting Accurate Financials. After: Asking For Too Much

Peter Izzo, TD Bank: “The biggest mistake small business owners make is in compiling the financial information. The bank can only lend based on what we can see – what’s on paper. I think the biggest challenge that I’ve seen … is that they’re presenting financials that aren’t necessary representing their business fairly – we all know they’re making more money than they’re really making, the problem is it’s not making it to their tax returns.”

And the reason the money isn’t showing on the business’s tax return is largely because of the business’s accountant:

“The most important decision a small business owner can make is in choosing their accountant. Too often an accountant’s value proposition is ‘I’m going to save you money,’ and really what they’re talking about is they’re going to limit your tax liability, and unfortunately, limiting your tax liability also has a negative effect of limiting your availability to credit.”

Once you’ve entered into the loan process, the biggest mistake can be not understanding why you need the loan. Don’t fall victim to the wives tale that you should ask for more money so the bank counteroffers with what you actually want. Banks want to know that you know what you need:

“Understand the purpose of the funds and don’t overreach…. What you ask the money for and how much you ask for is important because that demonstrates an understanding of your business from a financial perspective.”

Q: When is the right time to seek financing for a startup or ongoing business?

A: The earlier the better.

Especially with startups, business owners will stretch their reach far and wide trying to get alternative funding from friends, family and home equity – and banks will look at those decisions regarding how to finance the business, despite the fact that those funds don’t count as business debts. For a better chance at getting a bank loan, consider having conversations with bankers early on, and find the banker that will stick with your business for the long haul. Banks constantly wish that business owners had come in sooner, so that they could have offered more help and advice:

Daniel Adams, Wells Fargo: “That’s when we say, guys, I wish we could turn back the clock; I wish you could have come to us a year ago, when you really were a startup and you had a good business plan, you had great background, great character, great credibility…if we could have had that conversation a year earlier, we could have had more of a plan.”

And That’s Not All…

These tips were offered in just the first 15 minutes of the Google+ Hangout! To hear what else these experts had to say, watch the full hangout below. You can check out our past hangouts for information on crowdfunding and online lending, too:

How to Successfuly Launch a Crowdfunding Campaign

Learn What Online Funding Can Do For Your Business

To learn more about traditional funding options, please visit our traditional lending page. We also have a useful checklist for preparing to meet with a lender.

Photo Credit: ninniane, Flickr