A Step by Step Guide on How to Get a Business Loan
Copyright (c) 2010 Trey Markel
On December 17, 2008, the prime rate in the United States was dropped from 4.00% to 3.25%, the level that it currently stands at right now. The lower interest rate was initiated by the Federal Reserve to stimulate lending to individuals and businesses, the first salvo in the war to combat economic recession. On the surface, it appears to have made very little difference. The economy in the United States still declined and unemployment rose to a record high rate of over 10% in some states. Despite that, there's no way of knowing how much worse things would be, were it not for the lower prime rate. Today, as the nation crawls out from the hole it's been in, businesses are beginning to look for funding to expand or in some cases just to stay afloat.
There is a process involved in getting this funding, requiring a step by step approach and some knowledge of exactly how to get a business loan. That process begins with an evaluation of needs, continues with an examination of loans and funding options available, and hopefully culminates in a business loan which will help your company achieve its goals. It's not as simple as it once was, when all you had to do was show up at your bank and put some collateral up to get a loan. Credit score is now a factor, as is credit and payment history. The nature and success rate of businesses in your industry will also be taken into account. After what was a horrific three year period for banks and lending institutions, you're not going to be approved for a business loan without some heavy duty footwork on your part.
Evaluating Your Needs for a Business Loan
Just because you can do something doesn't mean that you should. Before you apply for a business loan, evaluate the reasons why you need one. The economy is improving. Are you running in the red right now or are you managing to pay your bills and make a small profit? Taking out a loan to increase profit margins is one thing, but is the debt you're taking on worth the return you'll get back from it? Make sure when you calculate these numbers that you include the interest payments and any fees the bank charges. Add up total cost and then project returns and how exactly those returns are going to be realized. There has to be a plan of some kind and the bank will want to see it before they give you anything.
Where to Go for a Business Loan
A Treasury report released at the end of last year showed that major banks had decreased business loan balances by $1 billion in the last quarter of 2009. These were the same banks that received TARP funds from the federal government's bank bailout. Justifying the cuts as prudent management, they nonetheless all pledged, after some pressure from the Obama administration, to increase lending in 2010. Some of those pledges of more business lending came from major players in the banking industry. Bank of America (5 billion more), Wells Fargo (25% more), and JP Morgan Chase ($4 billion more) have all increased their lending this year, though much of the JP Morgan Chase lending is in the form of business credit cards.
There are also online resources available, including sites that will shop your loan request around to various banks, financial institutions and private lenders. There are different types of business loans, including working capital loans, merchant account advances, secured and unsecured loans. You can borrow against money that is owed to you and you can use your credit card receipts from recent months as proof of your ability to pay. You can even sell your future credit card sales or accounts receivables, an act that doesn't technically qualify as a loan, but bears mention here. No matter which way you go you'll be facing the same questions and need the same set of numbers to back up your request for funding.
What do Lenders look for in Business Loan Applicants?
A simple rule of thumb when doing a self-evaluation of what the bank will look for is to look at the five C's: Character, Capacity, Collateral, Capital, and Conditions. Character is about you and your credit score and history. Capacity is proving your ability to pay. Collateral and Capital are very similar. They both offer a guarantee to the bank that you'll pay them back. Conditions refer to your knowledge of your own industry and the plan that you have for use of the money you're going to borrow. If you did your homework in the earlier step "Evaluating Your Needs for a Business Loan" this should not be a problem. The bank or lending institution will see that you have a definite plan for the improvement of your company and look upon that favorably.
Communicating with the Lender: How to finally get a Business Loan
Once you've evaluated your needs for a business loan, asked yourself all the difficult questions about credit-worthiness, and chosen a lender to apply to, it's time to walk through the door and present your case. Communication is the most important element at this stage of the loan process. You need to have the ability to explain what you want, why you want it, and how you plan to pay it back. Have a solid business plan in hand, with a detailed explanation about how you will use the money from a business loan and what you plan to do about paying it back. The financial information you present about your company should be current and accurate. The bank will turn you away of you try to rely on the successes of yesteryear. You'll also want to present alternate sources for repayment should the first plan not succeed. Remember the climate you're running a business in right now and what the banks have been through recently. If you cross all your t's, dot your I's, and anticipate any questions you'll be asked, there's no reason why you shouldn't be approved for a business loan.
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