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Banks loan money to stable, mostly profitable, companies and individuals to help finance business expansion and operations. A loan is usually for a specific time frame, often a number of years. Typically, the borrower pays a certain, fixed amount per mon th, which includes a portion of the principal (or amount borrowed) plus interest, a percentage of the loan that is paid to the bank to cover the expenses and risks the bank takes by making the loan.
For businesses that qualify (i.e. have been in business over 2 years and are profitable), bank loans can be a very flexible source of capital, and may come with time-saving conveniences, like being able to transfer funds by phone or online, getting credit cards and checks off one account, and separating business and personal expenses so you get that tax break on business interest.
Bank loans come in two types:
Established, profitable companies; banks rarely lend to start-ups or companies in trouble;
Companies that can meet the five "C's" that banks look for:
Franchises. This is one type of start-up that can often find debt financing.
It's a commonplace belief that banks lend money to those who don't need it. This isn't entirely true; actually, banks lend to people or businesses who need money but not to get out of trouble or to start a business.
To expand a profitable business. Banks like doing business with growing, thriving companies. Take advantage of this attitude and apply for loans and lines of credit when you're not desperate for money.
To finance a specific large purchase or business development that will increase current profitable activities;
When cash flow is strong, and it is clear that business income will cover the payments to the bank, known as debt service;
When you have or are buying sufficient collateral to cover the value of the loan in case of default.
When your company is very young (less than 2 years old) or not profitable. You'll be unlikely to qualify for the loan (there are exceptions: people who have had successful companies before using the same bank or those with large personal assets to use as collateral).
When you don't think you have a chance of getting approved. Each request for credit you make shows up on your credit report. If your report shows a lot of requests, that can make potential lenders wary.
For covering operating losses: bankers are not usually receptive unless recent sales are strong enough to cover past losses.
Develop a banking relationship: open your business checking account with a bank that has a reputation as a small business lender and utilize other business banking services such as money market accounts. Established accounts are likely to get the best hearing, and your banker may actually know who you are!
Know just what you intend to do with the proceeds of the loan; have all financial documents relating to that activity available to the banker, and show the banker the anticipated increased profits as a result of the loan. The more information you can supply, the more comfortable your banker will feel -- and the more likely she'll be to give you the loan.
Unexpected Fees: Quiz your banker carefully about fees connected with drawing up the loan documents, appraisals, or other closing costs.
Unclear loan terms or interest rates: Be sure you understand what the terms of the loan are, under what circumstances it can be called in (requiring the entire principal to be paid off), if the interest rate can vary and under what circumstances and by what amounts.
Negative industry trends: If your industry is in a recession, it may be hard to get a loan even if your business is profitable and your plans wise. Be prepared for it to take a long time to get bank financing if your industry as a whole is in trouble.
Applying for a loan has become so much easier than it used to be, that you might overlook some important details -- or, worse, fail to see the big picture -- like the long-lasting effect an unnecessarily high number of loan requests would have on your credit record. So here's a special checklist and tips to help you handle your application successfully.
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