CHAPTER TEN: Part C – Are you a small business owner or a startup entrepreneur? Do you want to learn what it takes to apply and get a bank loan for your small business? Then i advice you read on.
Bank loans are business loans offered by commercial banks or specialized banks such as Bank of Industry, Bank of Agriculture, Microfinance Banks, etc. Some small business friendly banks offer low interest rates and long repayment plans.
But most bank loan applications are not approved due to very strict loan approval conditions, such as the requirement that a business must have operated for a certain number of years before being eligible to take a loan.
However, despite the stringent terms and conditions of most commercial banks, loans are still being given out daily. Are you still interested in getting a bank loan for your business? Then here’s how to apply for a bank loan.
How to Apply for a Small Business Bank Loan
Sometimes, getting a bank loan may be the only option you have to secure the growth of your business. And of course, you don’t want to blow your only chance. So, in order to get your loan request approved, you will need to do things right. Here are the steps you should follow when you are trying to obtain a business loan from a bank:
1. Do your home work…perfectly!
Before you send your loan application to the bank, you should try as much as possible to address all the issues that your bank will consider before granting your request. These issues are briefly discussed below:
- Your personal credit history
As an entrepreneur, your personal credit history plays a significant role in your ability to secure a bank loan for your business. Banks and other institutions will look closely at your credit history and credit score before lending you money. This is because they need to have some insight of your financial management capabilities. No one wants to lend their money to someone who obviously cannot pay back!
Before applying for a loan, you need to obtain your credit reports from the reporting agencies and ensure that they are error-free. If there are errors in them, you should write the agency a letter to notify them of the error so that they can make the necessary corrections. Also, you must make sure that you are able to explain any late payments or defaults on your credit report. Overall, before approaching a bank, you need to put your credit history in order.
Banks in some countries won’t request for your credit score. Instead, they will instead your bank account statement reflecting your savings and withdrawal details over a specified period. If this is what is obtainable in your country, then approach your bank to retrieve the statement before applying for a business loan.
It goes without saying that you should have written a detailed business plan before approaching the bank for a business loan. Your business plan will tell the bank what your business is all about, and why it is feasible. So, you must give a good account of your business in both words and numbers.
Most banks will require at least five years of projected financial statements before they will give you a loan. In other words, you must try to look five years into the future and estimate your sales and expenses for those five years. This could be very difficult, but you can base your figures on market rates and estimates obtained from the competition.
- The profitability of your business
Though they are more concerned about getting their money back with interest, bank loan officers will still need to be convinced as to why you think your business will be profitable. Your forecasted financial statement should also come in handy here. To boost your chances of getting the loan, you must convince the loan officer that your business will be profitable, and that you will pay back the loan in a timely manner.
You must have a specific estimate of the needed amount. Before applying for a bank loan, calculate how much you will need in assets to start your business—such as inventory, money for payroll, supplies, manufacturing expenses, real estate, and miscellaneous assets. Not being specific about the amount you need would only show you off as unprepared for your business and clueless about your needs.
Look at all the banks around you. Don’t just approach any bank; start with the smaller, regional banks and microfinance banks, as you have a better chance of getting a loan from these banks—especially if you are just starting your business. To boost your chances of getting the loan, you will need to send applications to many possible lenders at once. So, you should have a list of all the banks you will be approaching.
3. Review the loan application requirements
Before sending your loan request to any bank, you should visit the bank’s website or check into one of its branches to find out about the guidelines for loan applications. The easiest way to having your application trashed is not presenting it as required by the bank. So, it’s very important to find out how each bank wants you to craft and submit your loan application.
4. Submit your application and make the appointment
In order to encourage the loan officer to give your loan application a second look, you will need to make it really compelling. You can start by writing a brief application letter summarizing your operation and reasons for requesting the loan, and submit it along with well-printed copies of your business plan and financial projection statements. You will also need to include an executive summary, as this is the first thing most loan officers will look out for.
Also, you must ensure that the whole package look professional. And end your letter with a request for an appointment with the loan officer. In all, be concise, succinct, and organized. Of course, there may be no hard and fast rules to follow on this step. Just follow the loan application guidelines given by the bank you are approaching and you will be fine.
Getting a bank loan is getting more difficult by the day, due to competition and other factors. But this doesn’t totally rule out your chances of securing one. If you diligently follow these steps, you will significantly boost your chances of securing a business loan.
10 Do’s and Don’ts of Applying for a Bank Business Loan
- Make a checklist. List all the steps you will need to take before sending your business loan application to the bank, and tick each task as you accomplish it. This will help you ensure that you don’t miss any of the vital steps.
- Understand your need. Before sending your loan application to the bank, you need to check out the available loan packages and find the most suitable one for your business. Don’t just state in your application that you need a loan; you should state the specific package you would like to obtain, and give your reasons for choosing the package.
- Ask questions. If some information about the bank’s requirements or guidelines leaves you completely at sea, feel free to ask questions. This will help you understand the requirements and meet them, thereby boosting your chances of getting the loan you are applying for.
- Know your limitations. Don’t bother applying for a loan if your business falls short of some important requirements. For example, if the bank requires the business owner to have a credit score of at least 750, or to be worth a specific amount in bank savings, don’t bother applying if you fall short of these. Rather than waste your time by going ahead to apply for loans from such a bank, try to find other banks with lower standards.
- Never try to hasten the process. Loan officers have a certain protocol for reviewing your application, approving the loan, and getting you the money. So keep this in mind before sending your application, and give a reasonable time frame to expect feedback from the bank. Most banks will take a couple of weeks or months to respond to your application. So, don’t try to force an appointment date on the loan officer or try to hurry them up.
- Avoid errors in your application package. Before submitting your application, strive to proofread your application letter, business plan, financial statement, and other documents required by the bank. Unpardonable typographical errors or irregularities in your calculations will only make your application a perfect candidate for the trash bin!
- Start with banks you are familiar with. There’s a much better chance that you will get a loan from the bank you or your business uses, since they already know who you are (and what your business does—if you have started one already).
- Use suitable property as collateral. As a rule of thumb, your collateral should be worth your principal, at least. You will only get your loan request denied if the value of your collateral is lower than the amount you are requesting for.
- Plan well for the appointment. An invitation for a meeting with the loan officer will not necessarily get you the loan, but a good presentation of your business at the meeting will. So, prepare very well for the questions you are likely to be asked, such as “Why does your business need this loan?” Preparing brilliant answers to these questions will help you give a good account of your business and you, and it will up your chances of getting the loan.
- Include your contact details in the application package. Add your email, phone number, fax, and other communication media by which you can be reached. If you leave these out by mistake…you already know the likely consequence.
7 Questions your Banker might Ask you Before Giving you a Loan
No matter how brilliant or compelling your loan application might be, most loan officers will still subject you to a face-to-face meeting, during which they will ask you questions about your business and the loan you are applying for. The following are the commonest questions that loan officers ask, which you are likely to be asked, too:
a. Is there a market for your product, and is that market growing?
You will need to describe your target customers and why they need your product or service. Also, you need to highlight the market’s growth prospects using figures from your market research. Loan officers ask this question to know your chances of being able to pay back the loan.
b. What are your revenue projections?
Your financial statement should come in handy here. Although they have seen the answer in your statement, loan officers still ask you this question to assess how much you know about your business. If there’s some contradiction between the figures in your financial statement and those in your answer, then you would have shot yourself in the foot! Also, this question gives the loan officer some insight into your business’s strength and your likelihood of paying back the loan in a timely manner.
c. How much money do you need?
If you are starting a business, this should be included at least in the start-up capital estimate. Be accurate, and request for enough money, so that you won’t have to scout for more money from other sources.
d. What are you going to do with the money?
Of course, they know you want to start or grow your business. But by asking this question, the loan officer wants to know how exactly you will use the money. So, you will have to provide, in detail, the designated use of every dollar requested—such as for operations (new employees, marketing, etc) or assets (equipment, real estate, etc).
e. When will you repay the business loan?
This is one of the major concerns of the loan officer. They know you intend to pay back the loan. But when? To answer this question, you will need to explain in detail how this loan will serve as a stepping-stone for your business. You will also need to convince the lender that your business is capable of repaying the debts through its expected profitability.
It is your duty to remind the loan officer that business is a risk, and that there are no guarantees that a business will succeed. But quickly add that you are willing to forfeit your collateral or liquidate the business (whichever falls within your plan) in case your business fails.
g. What will you do if you don’t get this loan?
You should also let the lender know that rejection of your loan request will not discourage you from starting or growing your business. It is important you portray a confident and determined personality, and tell them that you will keep trying other lenders until you get the loan you need. Giving this answer will create the impression that you are really confident and proud of your business.
While there are many other questions you might be asked, these are the most likely ones, as they are the most commonly asked by lenders. However, it doesn’t hurt to brainstorm for more likely questions and rehearse answers to them prior to your appointment with the lender.