Asking for a small business loan is a long, complicated, and deeply trying process. The Great Recession shook lender confidence, and some banks aren’t willing to take the same risks they once did.
This state of banking makes new small business owners understandably apprehensive about applying for loans. But with over 630,000 businesses created in 2013 – around 193,000 more than in 2010 – many are surmounting their fear and starting that long application.
However, few know what to expect when requesting a loan, and while there’s some basic advice out there about bringing in a business plan and profit forecasts, business owners need to be ready to do a little more than that.
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You Have to Answer Hard Questions
Most of the application process happens behind the scenes. Nearly every bank has a standard loan application you’ll fill out, and you’ll have to turn that in along with your business plan, personal financial details, and some sort of proof that you’re able to make money with this idea.
Then comes to interview, and that's where many stumble. Understand it is going to be conducted professionally and without malice, but they are going to ask you questions that assume your business will fail, and that’s rough. Chances are good that since you’re a new business, they’ll want a personal guarantee for the loan, meaning you may have to use your house as collateral. It’s hard to agree to that, but if you don’t, they’ll ask why they should believe in your business if you don’t.
They’re also going to want you to clarify exactly how you’ll pay back the loan, and if you’re predicating your answer on success, they’ll want to to know how you’ll do it without reaching that level of success.
You’ll be asked to explain exactly how you will use the loan, and why that plan best uses their money. I usually recommend looking for another business owner who went through this process, and trying a mock interview with them. They may not remember every probing question asked, but they'll help you find the right frame of mind to deal with those questions.
You Should Seek Out Competing Offers.
Don’t jump at the terms of the first offer. I know it’s easy to feel like you should because it feels like they are “taking a chance” on you, but that isn’t how banking works. Banks make money by lending money, and if they see your business as a reasonable investment, they'll offer a loan. It also follows that if one bank makes you an offer, others will too.
Traditional advice is to stick to community banks, but that lost its relevance years ago. A study sponsored by the Federal Reserve found advances in technology, coupled with deregulation, have led to large banks choosing to offer loans to small businesses.
In fact, another study by the SBA found lenders with assets in excess of $50 Billion held 75% of the total volume of small commercial loans. Of course you shouldn’t stick with huge banks either – rather, weigh your options and be ready to apply to more than one bank.
Different banks have different goals, so choosing a bank like First Citizens or Bank of the West, or a local institution, that has shown a predilection to small business lending increases the likelihood of securing a loan. Both the Treasury Department and the Small Business Administration maintain lists of institutions that use partial-government guarantees to offer more small business loans.
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You May Have to Look to Non-Traditional Lenders
Sometimes, no matter how prepared you feel, or how much research you do, you strike out. Non-traditional lenders always existed in some form, but most analysts warned people away from using unregulated institutions with unreasonably harsh lending terms. However, times have changed and there are some online companies that offer reasonable loans.
In fact, former Treasury Secretary Larry Summers, at an industry event aimed at online lenders, predicted they stood to capture over 70% of the small business lending market. A lot of small business owners choose to go to them first as it’s an easier, quicker application process. I don’t think that’s a good idea just yet but, if you’ve hit a brick wall with traditional lenders, don’t be afraid to sniff around online and see what’s out there.
Going up to anyone, hat in hand, to ask for a loan is tough. But banks are monolithic, faceless entities with an unfathomably complex system for assessing the risk and reward of prospective loans. The best thing you can do is to prepare as much as possible.
Get ready to answer some rough questions, and research other lenders, traditional and non-traditional, in order to better assess the loan’s terms. And if you feel like you did everything right but still got rejected, (politely) ask why. That insight could be the difference between getting an offer from the next lender, or going without.