Obtaining a Small Business
Loan
Five Helpful Hints!
There comes a time in almost every small business owner's career when borrowing money becomes necessary. Often, funds are needed to purchase commercial real estate and quit leasing. Sometimes, it's growth and the need for expansion that fuels the drive for financing. Whatever the reason, there are a myriad of financing opportunities available.
Many small business owners turn to their bank for traditional financing only to find that financial institutions often require substantial down payments and years of experience in a business or field before they will consider lending money. When this happens, an alternative is to turn to the specialized small business loan programs and specialized small business lenders.
Each year the Small Business Administration (SBA) sets aside billions of dollars to assist America's small businesses. Across the country, SBA lending has been an increasingly popular method of financing for the past few years. According to the SBA, in 1997, more than $8 billion in SBA loans were made to small business owners. And 1998 is once again a great year to let the government back your business plans.
SBA loans are available through participating lenders across the country who review and underwrite each request in accordance with their own specific credit policies and then submit the application to the SBA for their concurrence and approval. Some SBA lenders have Preferred Status with the SBA, which allows the process to move much quicker.
Some small business lenders have also developed their own specialized conventional loan products that offer up to 100% financing and longer terms-both of which make securing financing for many small business owners a reality.
So how do you secure an SBA or conventional small business loan? The key is in the preparation and presentation. Here are five helpful hints that should help make your trip to the lender a user-friendly experience:
Helpful Hint #1: Get Your Financial House In Order
Long before you approach a lender, obtain a copy of your personal credit report. Check it carefully for any inaccuracies or mistakes. Make certain that all accounts are current and there are no outstanding judgments or liens. If there is any derogatory information, it is better to be proactive and prepare a letter explaining what led to the problems and why the problem is not likely to occur again.
Next, gather all of your personal and/or business records for the past three years, including: tax returns, financial statements with schedules and attachments, interim year-to-date financial statements and anything else that you believe would help a lender. Neatly photocopy all of the documents and prepare them for your presentation.
Helpful Hint #2: Realistically Define Your Goals
Carefully evaluate your needs and purpose for borrowing funds. Consult your accountant to help prepare projected cash flows to determine your estimated future revenues. Never tell a lender that you want to borrow as much money as possible. Rather, you should have a specific amount in mind and the paperwork to show why you need it and how you will pay it back. Realize that you or your company will be required to finance a portion of the project costs.
Helpful Hint #3: Recognize Your Strengths And Weaknesses
Small business owners are traditionally confident and optimistic while lenders are often received as conservative and sometimes pessimistic. Identifying your establishment's strengths and weaknesses will help you bridge this ideological gap. Some of the most common weaknesses lenders find are: inability to demonstrate repayment ability, insufficient collateral, lack of management experience, insufficient cash injection and poor personal credit. Depending on the severity of any particular weakness, you can often overcome it if you are prepared with a particularly noteworthy and compensating strength. Don't get scared; just get prepared.
Helpful Hint #4: Start Early!
Although the process is constantly being refined and getting faster, it can still take several weeks to close a loan. Because of the wide range of business types, sizes, methods of operation and levels of success, commercial transactions are very different, and each is unique with its own nuances and complexities. In most SBA transactions, the loan request must first be underwritten and approved by the lender and then reviewed and approved by the SBA. Once a loan is approved, it can take from 30-60 days to fund. Borrowers can dramatically speed-up the process by supplying all of the necessary documentation up front. Again, be prepared and reap the benefits.
Helpful Hint #5: Work With An Experienced Lender
Like any other type of lending, small business lending is a specialty. Experienced small business lenders know the products, know the parameters, know the eligibility requirements and the documentation process. Smooth and quick processing of loan applications is contingent upon working with a commercial loan representative who knows the process and loan product intimately.
Good small business lenders will be able to prequalify you and your inn with a minimal amount of information and without completing the entire application. The entire prequalification process should take no more than a few days. If it takes longer, it is probably indicative of the lender's inexperience and you may want to consider finding a new lender. Remember that prequalifications are not approvals but more of a review and indication that, given the basic information reviewed, it appears you fit the program.
Follow the above steps, and you will position yourself as an innkeeper who is prepared. By being prepared, you will make it easier on yourself and easier for your lender to provide financing. In the end you should complete the process with an excellent loan product and outstanding terms that are tailored to fit the needs of your expanding operation.
David W. Moore, Jr. Norfolk, VA (757) 640-7592
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