5 Things Banks Look for When You Apply for a Small-Business Loan
You’ve got a business idea — but you don’t quite have all the cash you need to get it off the ground. So you might need to ask the bank for a loan, BUT you have to be prepared. These five tips will help you know what banks want from borrowers who are looking to fund their small business, in part, with a loan.
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Banking expert Michele Walters of Core Bank, a Small Business Administration-preferred lender, says most banks recommend entrepreneurs follow these five “Cs” of lending when they want a loan.
You’re a small-business owner who has unique needs; you’ll face challenges and opportunities that other borrowers probably won’t. So if you have questions about what resources you’ll need to help guide you on your business journey, call KCSourceLink at 816-235-6500 or tell us a bit about yourself, and we’ll draw up your free Personal Action Plan. Our services are free.
If you'd like to learn about what it takes to get a loan, along with a slew of other great advice if you're thinking about starting a business, check out the Business Basics in a Day program from the Kansas Small Business Development Center at Johnson County Community College.
1. Character: Can the Bank Trust You?
Your credit score and paying your bills on time can say a lot about your trustworthiness as a borrower. So mind your personal credit score. If it’s low, be honest and explain why. Being forthright with the bank about incidents that hurt your score and not keeping secrets shows that you’re honest and won’t have any bombshells lying in wait after the bank takes a risk and offers you a small-business loan. And a simple thing like paying your bills on time, which also affects your personal credit score, can show the bank you’ll make those small-business loan payments on time.
If your credit could use a little mending, KCSourceLink can connect you with resources that can help you boost that low score. Just tell us what you need help with, and we’ll link you up with pros who can help.
2. Capacity: Can You Support the New Debt?
The big question here: Can you keep your personal finances and business finances afloat? And to answer that question, you’ll need to do your research and calculate your financial projections in your business plan. If you’re stumped about how to write a business plan, classes and events through these awesome resources can even help you craft one that’ll knock a bank’s socks off:
Now, those numbers in your business plan will change, but illustrating your projections shows you’ve put some thought into what you want to do and can back it up with the numbers—certainly a good sign for the bank when it’s considering your small business for a loan. It shows you at least know the numbers and understand one of the most important concepts you’ll hear as a small-business owner: cash flow. Plus, that plan will come in handy later for additional loans, like when you add a product line, look for additional business locations or take on more projects and might need to borrow again to help your operation grow.
3. Collateral: If Things Go South, What Can You Offer the Bank?
A big thing banks look for when giving you a loan: what collateral can you offer? Collateral is something that assures the bank it will be compensated if you cannot pay your loan. And if you do default, they’ll have to consider how to liquidate your physical assets: stuff like equipment, inventory, accounts receivable, etc. Banks will also look at your personal assets to make up that shortfall, like a lien on a home.
Bottom line: It’s gut-check time: Do you believe in your business enough to invest in it?
4. Capital: Can You Make Payments, Even in Bad Times?
A lot of this boils down to relatively simple questions that you might’ve already considered with your personal finances: Can you pay your monthly bills? How much cash do you have? Do you have reserves for those unexpected expenses? Well, your business expenses work the same way.
Answering these questions for your business is important because the risk goes both ways, for you and the lender. So you have to weigh how much cash you’re contributing to the deal and if you’ll have enough money to weather a financial crash, one that might be localized in your community, or something more widespread, like the 2008 U.S. financial crisis. Planning and having contingencies can go a long way—and shows the bank you’ve checked your math and that you’re a good investment, even if the seas get rough.
5. Conditions: How Does Your Business Stand Out and Fit In?
Lastly, it’s important to zoom out and look at the big picture and how your business fits into it. How is the economy, especially the local economy? What are your industry’s trends? Why is your service or product needed or relevant? How can you sell it? Answering those questions can help you position your product and inform important decisions like whether to have a brick-and-mortar location (and then where you should put that location) or sell online. Or maybe there’s trend you can take advantage of to help position your business better for success. Or in a strong local economy might afford your business unique lending opportunities depending on the sector (like loans for construction or arts and culture).
The Most Important Piece of Advice
You never have to start a business alone. If you’re not ready for a loan and need some help getting your finances in order or if you do need a loan and need help with your business plan or pitch, reach out to us. You live in a metro with hundreds of resources, and KCSourceLink can connect you to those resources for free. Just give us a call at 816-235-6500 or drop us a line here, and we’ll plan your next steps to help start or grow your business.