The Inside Scoop on Getting a Business Loan: What Banks Look For
by Carrie Hinkel on January 23rd, 2008
Whether you’re starting a business or have an established company, the time may come when you need to borrow money -either for starting or expansion costs. Most business owners will end up turning to a conventional bank for a business loan. Knowing what’s expected from the lender can help to prepare you and your business before meeting with a loan agent and filling out a loan application. It just might increase your chances of getting a loan.
When deciding to give a company a business loan, most banks (big and small) will refer to what is commonly called the "Six Cs".
1. Capacity – For established businesses, banks will want to determine its ability to make regular payments on the loan. This will be one of the most important deciding factors for a bank to determine the size of the loan. You will need a good cash-flow statement as well as tax returns from the past two years. For businesses less than two years old, getting a business loan for more than $10,000 (without the owner as a personal co-signer) may be tough.
2. Credit – For businesses less than two years old, most lenders will want to look at the owner’s personal credit score. Banks want at least a score of 620 – anything lower may result in higher interest rates and unfavorable loan terms.
3. Capital – Before you submit your loan application to the bank, it would be wise to talk to a loan agent first to see what size loan your business will qualify for. For established businesses, a realistic loan amount will be 15-20% of your gross sales. For newer businesses or start-ups, that will depend upon your personal finances.
4. Collateral – For business loans, collateral will be large assets that the business owns – like an office building, warehouse, land, etc. For start-ups or companies operating for less than two years, banks may want to take a look at your personal assets if you are co-signing the loan. Do you own a home or land? Do you have a sizeable savings account, 401k or retirement savings?
5. Character – What is your business background and your experience in the industry? Put together a list of your credentials; the more experience you have and the better your reputation, the more comfortable a bank will be with your ability to make your business grow.
6. Conditions – If you are asking a bank to lend you money, they will want to know why. They want to make sure that the purpose is legitimate and makes sense to further your business along. If you’re trying to get a loan for an established business, it would be a good idea for you to update your business plan , as the bank may want to see that.
Knowing what the bank is expecting from your business will help you to be better prepared when asking for a business loan. Be sure all your paperwork is easy to read and understand, and be truthful in your sales and income. You can be sure a bank will check your numbers against tax returns and bank account balances – if the numbers don’t add up, you may have a hard time convincing the bank that you are indeed trustable.