The crunch made bank loans tougher to get, but with today’s low rates they’re worth the effort if you’re prepared to put in the time and legwork.
Until recently, the first place many entrepreneurs turned for funding was their bank. That’s changed since the credit crisis hit the United States. Since then, it has difficult even for seasoned business owners with a strong credit history to get a loan. However, that doesn’t mean bank loans are not worth pursuing. Just be prepared to do a lot of legwork to find a bank that is willing to lend and to provide plenty of documentation proving that you will pay back the loan.
1. What types of financing are available from a bank?
The two main types of small-business financing available are traditional loans and credit lines.
2. How are bank loans structured?
- In a bank loan, you borrow a fixed amount, such as $10,000, that is due by a certain date.
- You must make a set payment each month that covers the money you owe, plus interest.
- Typically, bank loans run for seven years, but the term may vary.
Bank loans are still worth pursuing if you’re prepared to do a lot of legwork and get the right documentation
3. How are credit lines different?
- With a credit line, you can borrow whatever amount you need up to a certain limit, during a set period of time, such as a year.
- You can take the full amount out until the end of the term. Alternatively, you could pay back a certain amount, and then borrow more money if the need arises
- You pay a fee to open the credit line but only pay interest on the money you actually borrow.
4. How do I know whether a bank loan is a good fit for me?
- Bankers generally prefer to lend to small business owners with solid experience in their industry that have run their ventures profitably for at least a few years.
- Startups have a much harder time getting loans because bankers always prefer to look at history, rather than projections.
- Before you invest a lot of time in applying for a bank loan, it makes sense to consider your chances of succeeding.
5. What if I’m starting a new business? Is it still possible to get a loan?
- If you are starting a new business, having corporate experience in your field can improve your chances of getting a loan, but not by very much.
- Former employees of large corporations are used to having lots of support and resources, which will not be available to them in a new business.
- Also, corporate employees tend to specialize, and typically don’t have the wide range of knowledge they need to be successful running a small business.
6. What do I need to qualify?
- You also need to be willing to put a fair amount of your own money into the deal, at least 25% to 50% of the financing you need to get a loan that is not guaranteed by the Small Business Administration(SBA)
- For an SBA-backed loan, the minimum amount is 15%.
- Outside sources of income or the involvement of a backer who has the financial resources to support the business by guaranteeing its debt or helping to keep the shelves in a retail store stocked if sales are slower than expected
7. How much does it cost to get a bank loan?
- Interest rates vary considerably on bank loans, but they are usually lower in the longer term than for other common types of funding, such as credit card financing.
- If you took out a bank loan for $25,000 or less that was backed by the Small Business Administration and was due in seven years or less, the maximum interest rate was 4.25% plus the prime rate (3.25% in July 2011), for a total of 7.5%.
8. How can I apply for a bank loan?
- First, build a working relationship with a banker by opening your personal and business accounts at the bank.
- A banker who is familiar with your venture will be able to help you find the loan that is the best fit for your business.
- For startups and other companies seen as riskier bets, banks prefer loans guaranteed by the SBA, to make they are protected if you can’t pay your debt back.
- Each bank has its own application process for loans that are not backed by the SBA.
- Some will require you and any other owners of the business to provide personal financial statements
- If you apply for an SBA loan, both you and the bank will need to fill out forms the government requires.
- If a bank has reviewed your business plan and financial records for your business and approved the loan, it will submit its approval and the forms you have filled out to the SBA.
- You will usually be asked to provide the banker with a business plan—often the deciding factor on whether you get a loan—so have one ready before you apply.
- If you can’t afford to hire a professional consultant who specializes in writing business plans, seek free or low-cost help from SCORE, a nonprofit that advises small-business owners.
9. What should your plan include?
- An explanation of your company’s competitive advantage
- A thorough look at your competitors
- A discussion of price points,
- Financials for the first two to three years, done on a month-by-month basis with copious notes, references, and assumptions.
- Month-by-month and sometimes week-by-week projections of revenue and expenses, with all the expenses listed.
10. What happens if I don’t pay back the loan?
- You will usually need to provide collateral for a loan. This is property or investments that the bank can seize and sell if you do not pay back the money you owe.
- It may be business equipment or vehicles,
- If your business doesn’t have any valuable property, you may be asked to use your home as collateral.
- That can be risky if your business fails, as you will not only be out of work but forced to leave your house.
11. Are there special considerations for immigrants in getting loans?
- Banks are leery of lending to anyone who doesn’t have a strong credit history, so if you haven’t had a chance to build your credit score in this country, borrowing may be challenging
- If you don’t have a strong credit history, you may need to get a co-signer for your loan. This is someone who agrees to pay it back if you can’t.
- To qualify for a loan backed by the Small Business Administration, you need to be a citizen or a legal alien.