Small Business Loans: Getting the Lender's Approval

When trying to get a business loan, it helps to view things from the lender's perspective.

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Bankers and institutions that lend money are often cautious in making loans to small businesses because of their high failure rate. As a result, these institutions have developed a lot of knowledge about the success rate of small businesses, and they apply this knowledge when they approve and deny loans. For that reason, it makes sense to study their approach, even though it may seem discouraging at first glance.

The Banker's Ideal

Bankers look for a loan applicant who meets these requirements:

  • For an existing business, a cash flow sufficient to make the loan payments.
  • For a new business, an owner who has a track record of profitably owning and operating the same sort of business.
  • For all businesses, an owner with financial reserves and personal collateral sufficient to solve the unexpected problems and fluctuations that affect all businesses.

Why does such a person need a loan, you ask? He or she probably doesn't, which, of course, is the point. Institutions who lend money are most comfortable with people so close to their ideal loan candidate that they don't need to borrow. However, to stay in business themselves, banks and other lenders must lend out the money deposited with them. To do this, they must lend to at least some people whose creditworthiness is less than perfect.

Measuring Up to the Banker's Ideal

Who are these ordinary mortals who slip through bankers' fine screens of approval? And more to the point, how can you qualify as one of them? Your job is to show how your situation is similar to the banker's ideal.

For instance, even if you haven't owned a successful business in the same field as your proposed new business, it can help if you have worked for, or preferably managed, such a business.

Further away from a lender's ideal is the person who has sound experience managing one type of business, but proposes to start one in a different field. Let's say you ran the most profitable hot dog stand in the Squaw Valley ski resort, and now you want to market computer software in Silicon Valley. In your favor is your experience running a successful business. On the negative side is the fact that computer software marketing has no relationship to hot dog selling. In this situation, you might be able to get a loan if you hire people who make up for your lack of experience.

At the very least, you would need someone with a strong software marketing background, as well as a person with experience managing retail sales and service businesses. Naturally, both of those people would be most impressive to lenders if they had many years of successful experience in the software marketing business, preferably in California.

Using the Banker's Perspective

Use a skeptical attitude as a counterweight to your optimism to get a balanced view of your prospects. What is it that makes you think you will be one of the minority of small businesspeople who will succeed? If you don't have some specific answers, you may be in trouble. Most new businesses fail, and the large majority of survivors do not genuinely prosper.

Other Tips for Success

  • Clean up your credit report. For more information, see Rebuilding Credit FAQ.
  • Write a business plan. For more information, see Business Plan FAQ.
  • Apply for the right type of loan. For example, a line of credit is often used to cover seasonal ups and downs, while a loan is better used for one-time equipment purchases.
  • State the specific purposes for which you will use the money. Your bank or lender will definitely want to know what you plan to use the money for.

Further Resource

For all the plain-English legal and business information you need to run your business well, see Legal Guide for Starting & Running a Small Business, by Fred Steingold (Nolo).

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