How to Get a Bank Loan for Your Small Business

When it comes to employment and the health of the economy, the strength of the nation doesn’t lie in large corporations but in small businesses. They create over 66% of all new jobs in the economy, and are the lifeblood of the nation. The problem is, during recessions small businesses often need loans to tide them over, but that’s when banks are least likely to lend.

So how do you go about getting a bank loan during hard times when banks typically decrease their lending?

The process isn’t complicated. It usually starts with a good banking relationship, which is usually a relationship with the bank where you make your deposits and do your checking. Of course you don’t need to get a loan for your bank, but can use your operating account to get a loan from another institution. To apply for a loan at any bank, you want to know the answer to three questions:

Who makes the loan approval decision?

What information do they need from me?

What motivates them?

Who decides?

Since you are going to ask for money and spend a not-so insignificant amount of time in the process, you have the right to ask who is going to make the decision on your loan. Is it a single loan officer, or is it a loan committee? Is the decision made locally or elsewhere? More people involved in the process means more questions and a larger time commitment in terms of the decision making and waiting required on your end.

What information do they need?

All banks will ask you for both your personal and business financial statements (income statements and balance sheets), such as tax returns. They might even ask for a business plan to judge your credit risk and chances of repayment. If you’re seeking a real estate loan, naturally they’ll require an appraisal estimate.

The old rule is not to give the bank more information than they ask for because the extra might hurt rather than help, but definitely provide all the information they request. The quicker you provide the information, the quicker you’ll get your answer.

How do they want it sent?

Today we have all sorts of options for sending information. Some has to be presented in person, some in writing, and some can be sent via fax or the internet. Follow their instructions and keep back-up copies of all the information you send.

What motivates them?

Banks make their money from making loans, so all banks need to make loans. That’s their lifeblood. However, some banks prefer different types of loans over others. For instance, most banks make real estate loans but some prefer commercial property loans and others prefer home loans. Some banks are experts at loaning money for automobiles or equipment. Some are experts at making business working capital loans, while others don’t touch business loans at all. They all have different areas of expertise. A local bank, which knows your area well, will often have greater leeway than a large corporate behemoth.

Banks can only make loans when they have deposits, and they thrive on business operating accounts that represent large deposits. Therefore a bank’s motivation to make a loan to your business increases dramatically if you use it for your operating accounts, as they don’t want to see those funds transferred elsewhere. Competing banks will therefore often offer all sorts of good loan terms if you transfer your operating account to their premises because those funds will help them make more money. Your bargaining chip is knowing the value of your accounts, and dangling that carrot to your advantage.

Are they motivated?

You can judge how motivated a bank is by how they treat you when considering your business. Is the loan officer helpful or excited? Are you treated with utmost respect? That’s probably a good sign.

When it comes to business loans, the same advice holds as for mortgages — take your loan request to more than one bank and shop around. Since you need money, don’t wait until you’ve been turned down by one bank to take your proposal elsewhere. Have the ball rolling in several courts. Be sure you visit an independent community bank, too, because they are often friendlier to local small business.

What do you have to do?

Just like you and me, bankers love to get out of the office so cement your potential relationship a bit more by giving them a chance to visit you and your premises. Give them a demonstration of the new equipment or facilities the loan is intended for. Show them first hand how the loan request will help you make more money, increase your banking deposits and create more community jobs.

The best way to get a business loan is to give your banker exactly what they need – signs that the loan will help you have further growth and a more profitable relationship with the bank.