Acquiring a Business Loan From the Bank
Obtaining a business loan from a bank can help a company buy new equipment, hire staff, or open additional locations. Traditional business loans can be especially appealing for small and medium-sized businesses because these loans usually carry lower interest rates than products offered by alternative lenders. Unfortunately, many big banks have cut back on small business lending in the last decade. While no one factor is to blame, it’s thought that small business loans are less profitable for large institutions than other forms of credit, such as mortgages. Small business owners shouldn’t be totally discouraged – if you have a profitable business with a track record of success, you may be able to qualify for a bank loan. Keep reading to find out what you can expect from your visit to the bank.
What to Bring to the Bank
When applying for a business loan, it’s important to come prepared with all of the necessary documentation. Most lenders will want to understand the details of your business and your plan for the funds before extending credit. What equipment will you buy? How many employees do you want to hire? What kind of collateral are you prepared to offer? Research the costs of the project that the loan will be used to fund, and provide an estimate of what future revenue will be generated as a result. Necessary documents may include a detailed business plan, company financial statements, personal credit and tax returns, and a loan request.
You may want to provide letters of intent written by commercial accounts, which state their intent to do business with your company. A market analysis, complete with targeted customer base and price points, can also be helpful. Competitor research can demonstrate that you’ve taken an objective, realistic look at your prospects for success. Potential lenders want to know that you’ve done your homework before asking for their help.
When considering the merits of a business loan application, banks often try to gauge the overall health and creditworthiness of the company by looking at factors like liquidity, receivables turnover, inventory, gross profit margin, and return on sales. By reviewing these well beforehand with a qualified CPA, a business can make adjustments that may make it more attractive to lenders.
Don’t hesitate to ask the banker what details she needs ahead of your meeting.
Your Business Credit Report
It can be common practice for a bank to pull a business’s credit file when reviewing a loan application. Building and maintaining reputable business credit scores and ratings can help reassure lenders that they’re dealing with a financially responsible partner. A business credit report can contain a wealth of information about the company, including existing credit accounts and balances, the number of years a firm has been operating, and past payment experiences.
Past payment experiences, also known as trade references**, help business credit bureaus like Dun & Bradstreet understand the payment habits of a business. Vendors and suppliers can report prompt or overdue payments to D&B, which can impact your business credit scores and ratings. This makes maintaining good vendor relationships an important element for any business seeking a loan.
Understanding the Risks of a Bank Loan
Business loans are meant to be repaid, and a default can bring serious consequences. Banks may seize collateral pledged by the business owner, and a company’s credit scores and ratings may suffer. This, in turn, may make a business less attractive to new and existing suppliers, vendors, and lending institutions. It’s important for business owners to borrow only what they can repay, and to consider unexpected circumstances that could affect their balance sheets.
How Dun & Bradstreet Can Help
A business with strong credit scores and ratings may be a more attractive prospect to lenders than a company that has neglected its financial obligations. Dun & Bradstreet offers a suite of tools to help small business owners monitor and maintain their business credit files. Company Update is free to use, and allows businesses to get a free D&B D-U-N-S® Number establish their credit file and . You can also update business details to make sure Dun & Bradstreet has accurate information on file.
Business owners interested in impacting and monitoring their company’s credit file can do so with CreditBuilder Plus™. Subscribers can check their D&B credit scores and ratings any time they choose, as well as submit trade references to Dun & Bradstreet for their verification and acceptance**. When business owners know about changes to their credit scores and ratings, it can be easier to anticipate vendor and lender reactions. Business credit monitoring can also be an important ally in helping detect fraud or mistakes.
The Bottom Line on Small Business Loans
Traditional bank loans offer many advantages for businesses, though it can be difficult to access these funds. Anticipating and addressing the concerns of the lender may spare you from frustration when sitting across the table from a loan officer. Regardless of whether the bank signs on to your plan, the process can be less intimidating if you come prepared.
Featured Photo Credit: Sno Mobi, Flickr