There are many reasons why a small business might need to borrow money. Some are already successful, and trying to expand their inventory. Others have just started, and need money to help them continue operating while they wait for their profits to catch up with their start-up expenses. Many have also begun to take out working capital loans so that they can gain an edge by hiring digital marketers. However, small businesses of all kinds who want to borrow money must consider the prospect of applying for a bank loan. Bank loans are some of the most common borrowing strategies for small businesses, since they provide capital at close-to-market costs.
Bank loans are also favorable to many borrowers because a bank typically doesn’t want to control your business. Unlike an investor, the bank doesn’t want a piece of your company in exchange for their money. They simply want to be paid back, along with any interest on the loan you borrowed. However, that doesn’t mean a bank won’t want to know something about your business before offering you a loan. In fact, you’ll have to present them with a business plan before they’ll even think about approving you. They need to see that you’re likely to make enough money to pay them back—otherwise, it’s not in their best interests to help you.
A bank will normally look for several criteria when assessing your business plan and considering your loan application. Be sure that your plan contains details of the following:
Proof of Cash Flow:
The best way to be approved for a loan is to prove that your business is making money. Make sure to collect your income statements and balance sheets for at least the three years immediately prior to your application, and be sure to have them accompanied by corresponding tax returns.
Some Form of Collateral:
In cases where a business is brand new, or where the business owner does not have a long relationship with the bank in question, the bank is likely to ask for collateral—something they can take possession of in the event that you fail to pay back the loan. This could apply to your inventory, your equipment, or even a portion of your home equity, so be careful. However, certain private lenders offer working capital loans without the need for collateral, which can allow startup businesses to borrow money with less risk.
Support From Cosigners:
If you don’t personally have the ability to take on more debt (i.e. your credit is bad), it can help to have a cosigner. A cosigner essentially puts their credit on the line for you. Think of it like a financial character reference or vote of confidence.
A Marketing Plan:
There was a time when banks didn’t care about your marketing plan, but that time is over. Marketing matters more than ever these days—especially for small businesses who have to compete for attention over the internet. Make sure your business plan includes detailed marketing strategies, so that the bank can see how you intend to acquire and retain customers.
Many banks base their final decisions on the character of the borrower as much as the plan they’ve put together. If you can show that you have a good head for business, they’re much more likely to lend you the money you need. The best way to prove this is by showing that you’ve run other successful businesses in the past. However, any records that show your management skills can be beneficial in winning the bank’s confidence.
Always have a business plan before you approach a bank for a loan, and make sure it contains the essential elements listed above. If you do, you should find it much easier to acquire the financial assistance you need to get your company up and running successfully.