Financing

Small Business Financing: Securing a Loan

Small Business Financing: Securing a Loan

When owning a small business, there will most likely come a time when you’ll reach out to a bank or financial institution in order to borrow funds.  Secured business loans are a common type of small business funding.  A secured business loan is any type of business financing that’s secured by some type of personal assurance or valuable asset as collateral or security.  However you choose to secure a business loan, you’re essentially promising the lender that you’ll repay your loan.  This way, if you aren’t able to repay your loan, the lender can use the assets placed as collateral to legally recover their losses.  Thus, it’s important to understand what your bank or lender wants before approaching them. This can mean the difference between being granted a loan or not.

 

Understand the basic principles of banking:

When presenting yourself to a bank or lender, represent yourself as a responsible businessperson, show that you are reliable enough to recompense lent money, and exhibit that you understand the basic principles of banking.  Take the time to see the loan through the eyes of the lender and appreciate the position they are in; that insight can significantly improve your chances of receiving a loan.

As a small business owner it can feel as if you’re constantly jumping through hoops to satisfy the expectations of a lender or bank.  However, keep in mind that banks and lenders have an obligation to government officials, investors, and the community in which it resides to keep them happy, the economic healthy, and the community growing.

Each banking institution is different:

Lending institutions vary in structure and purpose; they differ in their interest rate charges, their eagerness to take risks, the type of funding they make available, the services they provide, and even their attitude toward small business loans.

When choosing a banking institution, it’s beneficial to choose one in the local community your business resides in.  Banks local to the community are more likely to see an opportunity where a bigger bank may see risk.  Community banks are invested in seeing small businesses in the area grow.

Additionally, it’s rare for banks to loan a business, of any size, money if that business does not hold an account with them.  Task yourself with seeking a bank that will provide you with the financial support, expertise, and services your company requires presently and will need in the future.  If you find yourself struggling with this task, feel free to reach out to Abedian + Totlian for solid advice in your decision-making process.

 

Build Rapport:

Don’t overlook the importance of building a relationship of trust and goodwill with a banking institution; you will most likely need to request a loan at some point.  It’s equally important to not wait on building this rapport.  Reaching out to a new financial institution in the throes of a financial crisis will most likely gain negative results. Dedicate time and put in energy to building a rapport with a banking institution, this will take your business and its success much further.  Ask your accountant for recommendations, as they deal with financial institutions on a daily and weekly basis.

Bankers are generally conservative when it comes to loans. Part of their job is to minimize risk; and the safest way to minimize risk is to limit loans to only businesses that they know and trust. A good way to build trust and establish a relationship is to take out small loans and repay them accordingly on time.  It’s also important to meet all requirements of the loan agreement on paper and in spirit.  In doing this, you achievement both the bankers trust and loyalty, while securing future good faith with your banking institution.

Provide the information your banker needs to lend you money:

Funding loans and lending is the core element of banking.  Therefore, making mutually beneficial financial agreements is as important to your business as it is to your banking institution. Thus, understanding what information a loan officer will need and request of you is the most effective way to go about seeking the finances you need for your small business loan.

A solid loan proposal should contain the following information:

  • What is the specific purpose of the loan?
  • What is the exact amount of money that will be required?
  • What is the precise source of reimbursement for the loan?
  • What evidence is available to prove that the source of repayment is in fact reliable?
  • What other source of reimbursement is available if the primary source fails?
  • What business or personal assets are available for collateral?
  • What proof is available to verify the competency and capability of your management team?

A seasoned loan officer will ask you these question, put time and effort into knowing the answers.  Being unable to give a proper response to these questions will most likely lead to a negative outcome and reflect poorly on you as a company. Make sure to be knowledgeable and anticipate the wants and needs of your loan officer and banking institution.

Before you apply for a loan here’s what you should do:

  1. Create and write down a business plan; this document is the most important piece to your puzzle when seeking financial support. Your loan application should be built on and supported by a solid business plan.
  2. Have an accountant prepare historical finical statements. The lender will take comfort in the fact that an expert accountant has verified your past financial history.
  3. Prepare a list of references; your banker may ask to speak to your suppliers, customers, potential partners, or your team of professionals. If a loan offer requests references, promptly respond with names and contact information.

 

Applying for a small business loan can be stressful and even overwhelming, if not properly prepared.  Planning and having a comprehensive understanding of the process is crucial when requesting financial support.  To minimize stress and improve your odds, seek guidance from an expert accounting and tax professional.  The gain from using an experienced and trusted accounting firm is instrumental in the success of expanding your business.

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