Finding
the money needed to start a new business is almost always one of the most
difficult obstacles new owners face. The most likely (and easiest) sources
of capital are your families, friends and own savings. However, you should
not overlook institutional sources as well.
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Without a previous track record in
business, securing a bank loan may be difficult. Banks cite risk factors and
increasing costs of servicing small accounts as the primary reasons for
minimizing their exposure to small businesses. Still, it can be done. Here
are the steps that you should take to improve your chances of getting that
much-needed bank loan:
1. Keep in mind that to stay in business banks
need to make loans. Do not be
afraid to ask for one. That is what the loan officer wants you to do. To
increase your chances of getting a loan, look for a bank that is familiar
with your industry and who has done business with companies like
yours. Seek out banks that are active in small business financing. Some
banks lend on a conventional basis (lending money without government
support), while some banks participate in government programs (in the form
of government participations involving direct government funds or loan
guarantees). However, be aware that banks often demand stiff collateral
requirements for start-ups.
2. As an entrepreneur, make sure that you are
thoroughly prepared when you go to your banker's office to request a loan.
You need to show your bankers that a loan to you is a low-risk
proposition. Have on hand a completed loan application, copies of cash flow
and financial statement projections covering at least three years, and your
cover letter.
3. Learn to anticipate every question that he or
she has. Remember, the combination of information and preparation
is the most powerful negotiating tool in the world. A confident and
thoroughly prepared borrower is four times more likely to have his or her
loan approved than a borrower who does not know the answer to some of the
basic questions a banker asks. To show the extent of your preparedness, your
business plan should also include answers to your banker's questions. These
questions normally are:
- How much money do you need? Be as exact as possible; although adding a
little extra for contingencies will not hurt.
- How long do you need it for? Be prepared to go into detail about what
the money will do for you and why your business is a good risk.
- What are you going to do for it? Businesses use loans for three
things: to buy new assets, pay off old debts, or pay for operating
expenses.
- When and how you will repay for it? Your cash flow projections should
provide a repayment time frame. Convince the banker of the long-term
profitability of your business and your ability to repay the loan by
using your financial projections and business plan.
- What will you do if you do not get the loan?
4. Do not take an apologetic and negative
attitude. Keep your negativity in check. Present yourself as an
entrepreneur who can and will repay the loan. Boost your image by providing
your loan officer with any promotional materials about your business, such
as brochures, ads, articles, press releases, etc.
5. Dress in a professional manner for the
interview. This is a business transaction, so treat it as
such.
6. Do not stretch the truth in your loan
application. Broad,
unsubstantiated statements should be avoided. The lender can easily check
many of the facts on your application. If you cannot support statements with
solid data, then don't make them. Do your homework and spend time doing
research to be able to support everything you say, including every single
number in your projections. It is best to keep projections, assets lists and
collateral statements on the conservative side.
7. Be sure all your documents are neat, legible
and organized in a cohesive and attractive manner. Type all your
loan documents. Handwritten documents look unprofessional. Don't forget to
include a cover letter.
8. Do not push the loan officer for a decision.
Doing so might result in a rejection. Your banker cannot make a decision
until all your documentation is complete. To ensure a speedy decision, make
sure that your application is complete.
9. Be confident. An attitude of
confidence enhances your chance of getting the loan. Show that you can
make a success out of the money that the bank will lend to you. Visualize in
your mind the positive results of your bank application.
10. Keep trying one lender after another until
you get your loan. To improve your position as you change bankers
and banks, the best way is to ask for a referral from a successful
entrepreneur. Before you decide to approach a bank directly, find an
associate, friend or acquaintance that is in good standing with the bank to
give you a good referral. Bankers tend to deal more favorably those who were
referred to them by their best customers.
11. Failure to discuss risk in your application.
You must remember one thing: there is no business without risk. If you do
not discuss risk, the bankers will assume that you haven't thought about
risk. Let's face it - try as we might, we cannot plan for everything, for
every contingency, for every turn of events. Bankers would want to know if
you have planned for the major risks and how you intend to manage it.
Then, there is also the risk of too much success. The demand for your
products or service may exceed well beyond your expectations, and they would
want to know how you intend to handle success.
12. Remember that the first loan is usually the
hardest to get. Bankers prefer to lend money to borrowers who
have borrowed at least once and have paid back at least one loan on time.
They are not venture capitalists that make high-risk loans regardless of the
profit prospects of your business. Bankers prefer to lend to low-risk, low
profit ventures than to high risk businesses or those with no record of
accomplishment.
