Alliant Business Systems presented a webinar on “4 Things Banks Want to Know When You Need a Business Loan” on Thursday, March 15th, from 4:00 – 5:00 p.m. (EST).
Bank loans can be a boon to many small and medium businesses (SMBs). Small business financing allows for expansion, hiring, and anticipating many of the challenges and opportunities that arise in day-to-day operations. But for all they can do, those loans are notoriously hard to get. The bank is a business first and foremost, and they’ll be looking for a lot of information before they’ll open their coffers to you. Your business plan alone won’t be enough. The rules of thumb listed below, and the help of Alliant Business Systems, can help improve your odds of success.
What the Bank Sees
What does a bank see when they look at the average small business? They often see an establishment with a short operating history, a lack of business credit, and a situation where one person — either in the form of a sole proprietorship or a single-member LLC — is the business. Even though we suggest that you keep your business and personal credit separate, it’s likely that your bank will be putting your personal credit under the microscope until the business has a more established credit history.
What Banks Want to Know
If you’ve been diligent in setting up your business, you’ve probably drawn up a business plan. However, your potential lender — a bank, the SBA — will be looking for more than that if you try to get business funding.
Your credit scores will be a major determining factor in the kind and amount of business financing you may qualify for. In the early days of your business, before you’ve built a credit history, your personal credit scores from Equifax, TransUnion, and Experian will be the first place the banks look, so it’s important to make sure that information is accurate. You get one free credit check per year from the major bureaus, and many credit card companies offer FICO scores through your account. Later on, as you build business credit, the balance will shift to the business credit bureaus.
Time in Business
You might hesitate to do business with a vendor who’s just opened. It’s not uncommon to wonder whether they’re a fly-by-night, or if they’re in it for the long haul. Banks think much the same way. That’s why most loans from banks require at least two years in business, and even loans from non-traditional lenders require at least one year.
Another prime consideration is your annual revenue. Minimums vary by lender, and it helps to check the lender’s requirements before you apply. The typical minimum is between $50,000 and $150,000; whether you qualify, and the amount for which you qualify, will be influenced by this amount, because it’s seen as an indicator of your ability to repay the loan.
Ability to Repay
The bank has its own formulae for calculating ability to repay, but it’s also worthwhile to do some back-of-the-envelope math on your own before you apply. Besides knowing how much you need or would like to borrow, be realistic about how much of your cash flow can go toward loan repayments. Your income should be 1.25 times your total expenses at a bare minimum. You should also take repayment terms into consideration, since some lenders will require direct debit on a daily or biweekly basis — that can make loans a dicey proposition for businesses with uneven cash flow.
Improving Your Odds at Getting a Business Loan
If you’ve read this far, we understand if you feel a bit intimidated, especially if you’re new in business. There are some things that can help you qualify for a business loan.
- Build business credit scores
- Know your lender’s qualifications and requirements
- Have your papers — financial and legal — in order
- Write a strong business plan
- Provide collateral
There’s one more way to ensure the odds are in your favor: reach out to Alliant Business Systems for a free business credit consultation. From credit building to credit monitoring, we help businesses implement a systematic approach to business funding.