Banks are more conservative with their investment dollars than venture capitalists or angel investors. They are far more likely to approve a loan for an established business with proven credit over a startup or emerging company. Due to the fiduciary responsibility they owe their depositors, banks are not willing to take great risk, and the risks they do take come with high interest rates to compensate for this risk..
Luckily, government agencies such as the Small Business Administration (SBA), work with many banks to get the small business owners loans, with a business plan and thought out business loan request. Where banks are more likely to give smaller loans, venture capitalists look for much larger deals.
Before you approach a bank, know why you are going. This simply means if you want a loan for a certain amount, you should:
- Know EXACTLY how your business operates and why it makes money
- Know EXACTLY how the money will be used
- Know how you plan to repay the loan and over what time frame
- Be willing to take a significant financial risk in the business
- Demonstrate you’re responsible and can manage this business
Documenting this process will make it easier for you to have all your key documents in order, including a solid business plan. You will also need to have the most recent financial statements available, projections for the business, a debt schedule (detailed listing of all the business debts), a repayment plan and if necessary collateral. Collateral may include:
- Hard goods such as equipment
- Real estate
- Stocks or bonds
- Other personal assets
- Personal guarantees
Equity is important to a bank. Equity reflects your contribution into the business. Equity can be in the form of prior earnings left in the business, or direct infusion of capital or assets to help the business fun. Banks are more likely to approve a loan if it sees that the owners are investing a good percentage of the necessary startup capital into the business.
In lending, there is an inverse relationship between the business and the business owner The smaller the business, the more closely the individual behind it will be evaluated. Most small businesses are closely tied to the experience, know-how, and overall character of the owner(s). For this reason, you need to make sure you get your own financial records and credit in order before asking for a bank (or any lender, for that matter) for money to start a business.