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Bank Loans
1. What's a bank loan?
2. Who's it good for?
3. When is this the best choice
for me?
4. When is this not advised?
5. Tips for getting approved.
6. Ingredients you'll need on
hand.
7. Watch out for!
8. Web Links.
9. Before you apply!
 1.
What's a bank loan?
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:
- Secured: in which the borrower puts collateral, such
as real estate, negotiable stocks, or other assets, which the
bank can seize if the borrower defaults on the loan;
- Unsecured: in which no collateral is pledged, just the
good credit of the borrower.
2. Who
is this good for?
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.
3. When
is this the best choice for me?
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.
4. When
is this not advised?
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.
5. Tips for
getting approved
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.
6.
Ingredients you'll need on hand
- Basic financial package.
- Three years business financials and tax returns, plus three
years personal financial info, including details on assets and
debts.
- A clear description of how the money you get (the loan proceeds)
will be used and the value of the business it will generate.
- A business plan.
7. Watch
out for!
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.
8. Web
Links
www.AlliedCapitalExpress.com
Streamlines Small Business Financing Process
American Bankers
Association
Lists publications you can get and has articles on getting a loan,
banking relationships, etc.
The
Money Store
long the number one maker of SBA-backed loans.
Finance
Hub
Primarily a venture capital source, but includes links to more than
200 banks in the United States, Canada, Europe and Asia.
The Money
Page
A guide to banking and financing sources.
Creative
Investment Research.
Listing of women- and minority-owned banks.
9.
Before You Apply
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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