Many small businesses start out using personal assets, reaching out to friends and family, or, in a few cases, obtaining venture capital to get their companies off the ground. Eventually, many business owners reach a point where in order to grow or protect their businesses, they need to seek outside funding. Depending on the circumstances for the company, a small business loan from a traditional lender can be an attractive option.
What Are Traditional Loans?
A traditional loan is a bank loan, pure and simple. But often, acquiring one of these loans can require some preparation and multiple steps. Below you’ll find videos, case studies, links, and tips that can help you prepare to apply for a small business loan through a bank.
How to Get Started
Building a relationship with a lender can be key to getting a loan, and the earlier you start (i.e. before you really need it), the more your lender can help you along the way. Hopefully, by the time you are actually in need of the funding your lender will feel confident approving your small business loan.
Some business owners are so concerned about qualifying for a loan and trying to impress their bank that they forget to think about the lifecycle of their business overall. A few things you might want to keep in mind while considering whether or not to apply for a loan and starting the application process are:
- Unexpected expenses - licenses, unique insurance, merchant services expenses
- Your long-term marketing plan
- A transition strategy around the business owner's retirement
- Long-term partnerships to help take your business to the next level
Types of Traditional Lending
There are different types of bank loans and working with a lender can help you determine which one may be best for your small business. You’ll want to consider two major things when deciding between loan options:
- The terms of the loan
- The collateral required to obtain the loan
You’ll need to think long-term with a bank loan. Since many banks prefer to give business loans for larger amounts, you’ll likely be paying back what you borrow over a longer period of time. Here are a few types of financing you can get from a bank:
- Working capital/Lines of credit
- Business credit cards
- Short-term commercial loans
- Longer-term commercial loans
- Equipment leasing
- Letters of credit
While you can go to almost any bank for a business loan, there are some banks that have programs for small businesses. You can usually find the banks that do by either asking them directly or through an online search.
There are also different kinds of banks. Here's a quick overview of a few of them:
When most small businesses think of asking for a loan, they tend to turn to the bank with which they have an existing relationship. In most cases this is a national bank. These banks offer multiple avenues of funding and tend to grant loans of larger amounts to businesses that are well established and have solid financials. Businesses that choose and qualify for lending from a national bank may receive better terms. However, because this type of lending is heavily regulated, it has the strictest guidelines and made move somewhat slower than other lending options.
The amount these banks lend can range from $5,000 to millions of dollars. The algorithms for loan approval vary from bank to bank, but many traditional lenders take into account both your personal and business credit profiles. Other factors can include collateral, character, and capacity, as well as the other Cs of credit. If you do decide to pursue traditional lending, you'll want to make sure that both your personal and business credit files are up to date.
You'll also need a solid and reliable business plan that shows a well thought out vision of what you plan to do with the money that you are asking to borrow. Sometimes knowing this will be a requirement in advance and can help you better determine which type of funding is right for your business.
Traditional banks may have stricter requirements than other types of funding, but once a bank approves a loan, many bankers build solid relationships with their clients and help them grow and succeed.
Community banks tend to focus on lending to small businesses that share their local community. According to the Independent Community Bankers of America, community banks account for 60% of small business loans, despite only being 15% of the total banking market. Community banks approve half of all loan applicants, compared to bigger banks that tend to approve only about 20%. The amount a community bank will lend varies by institution, but a good range to expect is anywhere from $5,000 to $500,000.
Because these smaller institutions have the time to get to know you and want to build a relationship with you before you ask for a loan, your character and credibility can count even more with a community bank.
Community banks can have different loan specialties as part of their loan portfolios. For example, one might specialize in working with general contractors, while another might focus on commercial real estate loans. It's worth asking if your community bank specializes in certain types of loans. If they don't, they may be able to point you in the direction of someone who does. To learn more about community banks visit the Independent Community Bankers of America website.
Credit unions might seem like banks initially, but they're unique because they're member-owned, non-profit cooperatives that don't have to answer to stockholders. This allows them to be very customer focused.
Credit unions can be a great source of capital, offering everything from short-term, long-term, secured, and unsecured loans to SBA, working capital, commercial, and start up loans. A few credit unions even offer lines of credit, equipment financing, and industrial or commercial real estate financing.
While credit unions have regulations on how much they can loan to small businesses, they usually have very reasonable rates and may be able to get you the funding that you need. Qualifying for a loan with a credit union tends to be less stringent than other traditional lenders. If you have good credit, you can usually secure a loan and some are even willing to work with you if you have poor credit or extenuating circumstances.
You may find that certain credit unions are specializing in a specific trade or industry. Each credit union will be unique. But again, investigate the ones that are focused on the type of business your company does or are affiliated with organizations that you or your company belong to. For example, USAA is one of the biggest credit unions in the country and membership is based on military service. This membership can be passed down through generations. Even if you aren't active military or have never served you may still qualify.
Credit unions are an increasingly important resource entrepreneurs can turn to for their business funding needs. To learn more about credit unions, visit Smarter Choice.
How to Prepare for Your Lender Appointment
Ideally, you’re starting to work with a lender early on in your loan process, and have discussed with them what they'll expect before your appointment to officially discuss your small business loan. A few things you may need to have/know for your appointment are:
- A business plan
- Financial statements
- Personal information
Some banks may also be asked for your Dun & Bradstreet D‑U‑N‑S® Number either on your application or during the application process.
What to Bring to Your Appointment for a Small Business Loan
Preparing for a lending appointment can be a bit of a grey area because different banks (or even alternative lending institutions) require different things. However, there are some key items that are usually required by most lenders when you apply for a business loan.
Here is a list to get you started:
Basic Information about Your Business
- Business name
- Business address (physical address, no P.O. Boxes) and contact information, including phones and email addresses
- History and status of your company, such as when it launched, ownership type, and names of the current owners
- Business Taxpayer Identification Number(s) (EIN). Your Federal Taxpayer Identification Number can be obtained through the IRS, and certain states require a state taxpayer ID number as well. A Social Security Number can substitute for this
Up to Date Financial Records
- Gross Annual revenue or sales
- Business banking account number and balance information
- Company tax returns. These can be obtained from the IRS.
- Cash flow analysis prepared within the past 90 days, including scheduled debt payments and accounts payable and receivable
- Your name and contact information, including home address, phone number, and email
- Social Security Number(s)
- Country of Citizenship – if not United States
- Date of Birth
- Annual household income
- Personal banking account numbers and balances
- Last 3 years Personal Tax Returns for each owner that owns more than 20% of the business
- Personal Financial Statements for each owner who owns more than 20% of the business
- IRS verification form (4506-T) for each owner
This may seem like a long list at first, but keep in mind that these meetings are just the beginning of the journey for you and your lender. You don’t need to bring everything on this list to your first meeting, but being prepared can help ensure your loan application process starts off smoothly.
The exact requirements for each lending organization may be different, so researching your top choices in advance is always a smart idea. Some traditional lenders will look at your business credit report when deciding whether to approve your loan application or not, so it can be helpful to be aware of what's in your file. This article explains how to read a business credit report and can help you understand what your lender might see if they use your Dun & Bradstreet business credit information to help with decision making.
Traditional Lending vs. Alternative Lending
With an abundance of alternative types of funding, you may wonder what the benefits of traditional funding could be. For some businesses, traditional funding may be a better option.
Bank loans usually:
- Have lower interest rates
- Offer tax benefits
- Allow you full ownership in your company (as opposed to venture capital)
If your business is in a good position to apply for a bank loan, it could be more beneficial than alternative funding. If not, other options such as online lenders or crowdfunding may be right for you.
Additional Help Getting a Small Business Loan from a Traditional Lender
Some organizations work with lenders to help small businesses get loans. One of these organizations is the Small Business Administration (SBA). The SBA works with lenders and small businesses through their 7(a) loan program, where they guarantee part of a small business loan in the result the business owner defaults. This helps mitigate risk for the lender and can help small businesses get loans.
The SBA is an independent government agency that helps entrepreneurs start, build, and grow their businesses. The SBA can be a great resource for small businesses because it offers a wide variety of loan programs and additional services specifically for small business owners.
With an SBA loan there are three players: the SBA, the lender, and the small business applicant. The SBA doesn't fund loans directly. Rather, it guarantees a portion of the loan in the event that loan defaults, thus mitigating risk on behalf of the lender. The lender can be a regulated bank, a credit union, or a community-based lending organization.
The most popular SBA loan is called a 7(a) loan. It is the SBA's primary loan program and is used most often because of its flexibility, longer terms, and potentially lower down payment than other traditional lending options. It also has broad eligibility requirements and credit criteria to accommodate a wide range of financing needs. To qualify for an SBA loan under this program, a small business must meet both the lenders criteria and the 7(a) requirements.
The SBA is also a great resource for other types of lending information, including help with counseling, capital, contracting, disaster assistance, and advocacy initiatives. To learn more, check out SBA.gov.
Build Your Business Credit
If you aren't ready for a traditional small business loan, but think you might want to apply for one in the future, you may want to consider building your business credit file. It’s possible that your bank of choice or SBA lender uses business credit information to help determine whether or not to work with companies and at what terms. Your business credit file has firmographic information for your business, scores and rating, and a variety of other events-related information and there are a few different steps you can take regarding your file, but the first is to make sure your business information is complete. This step alone can help lenders verify that you are an actual business when they compare your business information in your application to what they see in your file.
It’s important to remember that building any type of credit history takes time and planning. You can learn more about how to build your business credit file here, and in the meantime, follow these steps to help keep your business attractive to lenders:
- Maintain your personal credit. Whether your business has credit history already or is still building it, you may still find that your lender will want to do a personal credit check before approving a small business loan. This can be especially true if you own more than a 20% stake in the business.
- Obtain credit early. If you can, apply for business credit before you need it to help build your credit history. Having credit available can also be useful if your company faces unexpected expenses.
- Cultivate your credit. Your credit can help you establish a good payment history, especially if you're able to keep your balances low. The length of your credit history can be important, as can your history to meet your commitments and pay off your debts.
- Consider using multiple lenders. Every lender has different policies, and these policies can sometimes change with short notice. By having credit lines through multiple lenders you will be better prepared in the case of sudden emergencies or account closures.
Learn more about business credit and how it can help your business with funding, contracts, and more.
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