Four things you can do to prepare for a small-business loan
By Mike Child
Many businesses are thinking about how to grow. After a few years of focus on the basics to keep strong enough to weather the economic storms, business owners are ready to move forward at a good time for expansion, when the market isn’t yet up to pre-recession levels. However, many businesses don’t have the capital they need for growth, which, combined with low-interest rates, may make it a good time to consider a small-business loan. I would recommend reviewing the following to prepare for financing:
Get to know your loan officer. It’s important to develop a relationship with your lender and the loan officer you work with. When your lender knows who you are, they can help you find the financing option that fits your business the best. Find a lender that cares about your business and wants to know more than just the numbers.
Prepare or update your business plan. Lenders want to be sure you have a plan for your business’ success, and they want to know what it is. Update your company’s goals and financial projections and your lender will have something to use when they consider how financing will help you in the long- and short-term future. Your business plan should address the best- and worst- case scenarios. The U.S. Small Business Administration has a great outline of the elements you should include, but you can always ask your loan officer what types of documents and descriptions you should include.
Evaluate your financial fitness. This is an area where your loan officer will be especially helpful to you. You may not even know what it means to be in good financial shape for a loan. Every business and every borrower has a different situation, so there isn’t a set, simple checklist. Some lenders will look at length of time in business or net worth, but you can find lenders, especially at community banks, that will look at your business beyond the numbers. It will come down to whether or not the applicant is likely to repay the loan and capable of doing so. Some questions to consider: Does the business make conservative or risky financial decisions? Is the business owner conservative with personal finances? Will the business owner sign a personal guarantee? Is there a strong base of capital available for collateral for the loan? What is the business’ margin of error for the expected growth? What is the back-up plan in case of a situation that threatens the business’ financial structure? Have you developed at least two ways to repay the loan?
Know the types of financing available. There are different types of loans commonly used by small businesses.
SBA-guaranteed loans are partially guaranteed by the SBA, meaning the business is more likely to be approved for attractive rates and financing, since the risk is shared between the lender and the SBA. They usually require about half the capital as down payment. If you’re worried that your business may be too big to qualify for an SBA loan, know that 95 percent of Utah companies are eligible. Look for an SBA Preferred Lender, since these types of lenders can approve your loan faster than non-preferred lenders.
Conventional loans may require more money down than an SBA loan, but historically low interest rates make these attractive. There are loans that are good for short-term cash needs like building up inventory and funding accounts receivable and others that are commonly used for purchasing equipment, vehicles, furniture, renovations, expansion or commercial mortgages.
Personal lines of credit, like credit cards or home equity lines of credit, are convenient, but can be risky. Credit cards have high interest rates and can negatively impact personal credit. Home equity loans use the borrower’s home as collateral. However, this model allows the company to utilize its capital to grow the business and gives the owners an opportunity to increase and diversify their personal wealth with commercial real estate.
Small business loans are key in helping to keep communities growing and people working. If you feel overwhelmed by the loan process, use this guide to prepare. Community banks and other lenders want to lend to local businesses. Loan officers are there to help you grow your business.
Mike Child is a business-development officer for Lewiston State Bank, which has four locations in Logan, North Logan and Lewiston, Utah and Preston Idaho. Mike’s 25 years of lending experience allows him to identify customer needs, especially in the areas of small business and new residential and commercial construction. He has served on the board of directors for the Cache Valley Home Builders Association and the Big Blue Scholarship Fund.