Time to Startup!

The BizFilings blog covering business tips and trends.

3 Step Approach to Securing Small Business Loans

Published on Mar 21, 2012

Summary

Read '3 Step Approach to Securing Small Business Loans' at 'Time to Start Up,' the small business blog by BizFilings.
Obtaining a small business loan has been difficult for entrepreneurs over the past few years, as lenders instituted stricter credit standards and investors tightened their purse strings following the financial crisis. However, a recent report from the Federal Reserve showed demand for small business loans increased through 2011. Remarking on the Fed report, a senior economist told Bloomberg that banks may be "moving away from the 'buckle down' approach," easing lending requirements. Small business owners will likely be heartened to hear this, but to secure small business funding in the form of a bank loan, entrepreneurs must be smart about how they approach a potential lender. Step 1: Take stock When approaching a bank about a potential lending opportunity, it's crucial to have a solid business plan that shows how you plan to use the money. A loan application package will need to include hard numbers to back up the viability of the plan, and should support a case for how your business will be able to pay back the loan. Reviewing financial statements in advance of approaching a lender is also wise because it will give you a chance to take stock of potential collateral for the loan, which may include hard goods, real estate, stocks or bonds and personal assets or guarantees. It's useful to keep in mind that, in some instances, a lender will allow a business to use a purchase order as collateral to obtain the resources necessary to fulfill the order. Step 2: Consider resources There are many local and national organizations that provide support and services to SMBs seeking loans. Before approaching a lender, an entrepreneur can reach out to these organizations. For example, the U.S. Small Business Administration has a loan program through which it guarantees 50 to 90 percent of a bank loan. The SBA usually backs loans up to $2 million, with the number going upwards of $4 million in some cases. The Small Business Jobs Act of 2010 increased limits on SBA loans and also established a fund for smaller banks in order to spur more lending to SMBs from these institutions. Step 3: Make a good first impression, cultivate the relationship Applying for a loan could be the start of a long relationship with a financial institution, so it's important for entrepreneurs to put their best foot forward from the start of the process. Business owners who have done the necessary homework of drafting a solid plan and considering collateral should be able to make a specific case for why they are a good candidate for a loan, having clear answers for such basic questions as how much money is needed, how it will be spent and how it will be repaid. That said, lenders are not looking for an elaborate presentation. Speaking to the Los Angeles Regional Small Business Development Center, a business adviser recommended that loan applicants keep their answers "short and simple" during the application interview. Entrepreneurs would also be wise to consider what kind of financial institution they will be working with, to prepare for meeting with a loan officer. Community banks and other smaller lenders may have a less standardized loan application process than larger banks, as they put a premium on forging relationships with local businesses. However, the trade-off is that smaller lenders do not have the same resources as bigger banks, which could impact enterprises seeking substantial loans. Regardless of whether you're working with a large financial institution or a community lender, it's important to maintain good relationships with loan officers and other representatives of the lending institution. This could substantially ease the process of applying for future loans.