Most small businesses will, at some point in their life, go to a bank or other lending institution to borrow money for business enlargement of their operation.
By: Hitesh Khan/
Many small business owners, however, initially fall victim to several of the common and potentially destructive myths that concern applying for loans for business enlargement.
For example, first-time borrowers commonly believe:
- Lenders are lined up and eager to provide money to small businesses.
- Banks are willing sources of financing for start-up businesses.
- Loans are obtained by talking the lender out of funds.
- When it comes to seeking money, the company speaks for itself.
- A bank, is a bank, is a bank, and all banks are cold, impersonal institutions.
- Banks do not need and really do not want the business of a small firm.
Some research shows that over 60 per cent of all small businesses that borrow money get that money from commercial banks. This places banks among the largest sources of credit; and makes them one of the most vital components to small business survival.
Understanding what your bank wants, and how to properly approach them, can mean the difference between getting your money for business enlargement and having to scrape through finding cash from other sources.
A Mile In The Banker’s Shoes
There is a name for people who simply walk into a bank and ask for money – Bank Robbers. To present yourself as a trustworthy businessperson, dependable enough to repay borrowed money, you need to first understand the basic principles of banking. Your chances for receiving a loan will greatly improve if you can see your proposal through a banker’s eyes and appreciate the position that they are coming from.
Banks have a responsibility to government regulators, depositors, and the community in which they reside. While a bank’s cautious perspective may be irritating to a small business owner, it is necessary in order to keep the depositors money safe, the banking regulators happy, and the economic health of the community growing.
Picking A Local Favorite
Banks differ in the types of financing they make available, interest rates charged, willingness to accept risk, staff expertise, services offered, and in their attitude toward small business loans. Ultimately your task is to find a business-oriented bank that will provide the financial assistance, expertise, and services your business requires now and is likely to require in the future.
Realise The Value Of Intimate Conversations
Devote time and effort to building a background of information and goodwill with the bank you choose, and get to know the loan officer you will be dealing with early on. Building a favorable climate for a loan request should begin long before the funds are actually needed.
The worst possible time to approach a new bank business enlargement is when your business is in the throes of a financial crisis. That’s like walking into a funeral parlor carrying a body!
Remember that bankers are essentially conservative lenders with an overriding concern for minimising risk. Logic dictates that this is best accomplished by limiting loans to businesses they know and trust. Experienced bankers know full well that every firm encounters occasional difficulties; a banker you have taken the time and effort to build a rapport with will have faith that you can handle these difficulties.
A responsible reputation for debt repayment may also be established with your bank by taking small loans, repaying them on schedule, and meeting all facets of the agreement in both letter and spirit. By doing so, you gain the bankers trust and loyalty. He or she will consider your business a valued customer, favor it with privileges, and make it easier for you to obtain future financing.
Enter With A Silver Platter
Lending is the essence of the banking business and making mutually beneficial loans is as important to the success of the bank as it is to the small business. This means that understanding what information a loan officer seeks, and providing the evidence required to ease normal banking concerns, is the most effective approach to getting what is needed.
A sound loan proposal for business enlargement should contain information that expands on the following points:
- What is the specific purpose of the loan?
- Exactly how much money is required?
- What is the exact source of repayment for the loan?
- What evidence is available to substantiate the assumptions that the expected source of repayment is reliable?
- What alternative source of repayment is available if management’s plans fail?
- What business or personal assets, or both, are available to collateralize the loan?
- What evidence is available to substantiate the competence and ability of the management team?
Even a brief examination of these points suggests the need for you to do your homework before making a loan request for business enlargement. It is a virtual certainty that an experienced loan officer will ask probing questions about each of them. Failure to anticipate these questions, or to provide unacceptable answers, is damaging evidence that you may not completely understand the business and/or are incapable of planning for your business enlargement.
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