Small Business Loans

Finding the capital for a new business or business expansion is often the most difficult job an entrepreneur will undertake. It is time consuming, stressful, and often frustrating, but a little planning and preparation beforehand will save you lots of aggravation and disappointment. Like any business partnership, which is what obtaining small business loans is, the partners want to be assured you have researched your options and know exactly what you need before coming to them for a small business loan.

Borrow Money (Get Loans) Successfully

The common perception is that small business owners have a difficult time getting business loans. While this is not necessarily true, what is true is that what the businesses that fail to secure loans have in common is not their size but their unpreparedness. The fact is that banks make money by loaning money. If, however, you request a business loan when you are not properly prepared, you send a signal to the lender in neon flashing lights that says, “High Risk!”

Being prepared means knowing exactly how much of a business loan you need, why you need it, how you will pay it back, and, most importantly, what lending institutions are looking for when they approve small business loans. Lenders want to make loans, that’s how they make money, but they must make loans they know will be repaid. The criteria loan officers use to judge business loan applications are commonly referred to as the five C's of Credit.

The 5 C’s of Credit

Character 

Lenders will order a copy of your credit report and look at debt repayment trends. They want to know simply if you pay your bills and if you pay them on time. If there are blemishes on your report, be upfront and explain them before the lender discovers the information himself.

Cash Flow

Lenders will look at historical and projected cash flow statements to determine whether you will be able to repay the business loan and still have money to adequately run the small business. Make sure your projections have sufficient, documented justifications and outline any and all assumptions used when preparing the cash flow statements.

Collateral

Collateral is an asset (something you own), which a lender may claim to satisfy a business loan in the event the business loan is not repaid according to the required terms. Many times the assets purchased with the loan money serve as collateral but if the small business does not have enough collateral or the money is being used for a non-asset purchase, the bank will look to personal assets.

Capitalization

Capitalization refers to the basic resources of the small business including owner's equity, retained earnings, and fixed assets. Coverage ratios and debt to equity ratios are important factors for lenders but you do not have to be fully capitalized to qualify for a loan. You do have to prove your current capital is being used efficiently and justify why you need this business loan.

Conditions

These are factors that affect the success of the small business but are external to the business. The lender will assess the industry, market, and environmental conditions to satisfy the institution that you have considered all possible threats as well as opportunities that will impact your small business and its ability to repay the business loan. Examples of conditions include government regulation, competition, and industry trends.

Be prepared when applying for a business loan, take time to talk to your banker about your financial needs, and establish a relationship. Each bank has different requirements and time frames and with a little planning you will find the one that fits best with your small business needs.

Another useful article on this topic is Small Business Loan for People With Bad Credit.

Source: David Gass, President & CEO, Business Credit Services, Inc. Business Credit Services, Inc. specializes in helping businesses build business credit and establish an excellent corporate credit history. Download their free booklet How to Build Business Credit at http://corporatecredit.biz

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