Bank Loans for Small Businesses

Traditionally, banks are more conservative with their investment dollars. Unlike many venture capitalists or angel investors, they are far more likely to approve a loan for an established business over a startup or emerging company. This is largely due to the fact that they are investing the money of their depositors.

However, thanks to government agencies such as the Small Business Administration (SBA), which work with many banks, small business owners can get business loans from banks with a strong business plan and well-prepared business loan request. Moreover, banks are more likely to give modest-sized loans, whereas venture capitalists are looking for much larger deals.

First and foremost, prior to approaching a bank, you should have all your key documents in order, starting with a solid business plan. You will also need to have the most recent financial statements available, projections for the business (this is typically in the business plan), and a repayment plan, plus collateral. Collateral may include:

Hard goods such as equipment;

Real estate;

Stocks or bonds;

Other personal assets;

Personal guarantees.

Banks also want to know that you're making your own investment in the business. A bank is more likely to approve a loan if (pending a solid business plan) it sees that the owners are investing a good percentage of the necessary startup capital into the business.

To maximize your chances of receiving approval on a business loan from a bank, it's wise to look at the situation from the standpoint of the lender. A lender wants to know:

Exactly how this business will operate and why it's expected to make money;

Exactly how the money will be used;

How you plan to repay the loan and over what time frame;

That you're willing to take a significant financial risk in the business;

That you're responsible and can manage this business;

Who else is involved in management or operations, and that they will also be responsible for the proper use of the money from the loan.

The smaller the business, the more closely the individual behind it will be evaluated. Most small businesses, in the forms of sole proprietorships or partnerships, are closely tied to the experience, know-how, and overall character of the owner(s). Therefore, you need to make sure you get your own financial records in order before asking for a bank (or any lender, for that matter) for money to start a business. A solid personal credit rating is also very important, since a small business is typically an extension of the individual who starts it.