Obtaining a Bank Loan for Your Small Business

You know that your small business idea has the capacity to make money - but first you need to find the cash to get it off the ground. Bank loans are just one option available to entrepreneurs, but they are one of the most common sources of start-up capital, as well as financing expansion. Free accounting software can help you determine how much cash you need and increase your banker's confidence in your cash flow.

How do I find a bank?

Conducting a bit of research will help you find the right bank for your business. This may include polling friends and associates for any recommendations, as well as looking for news reports on which institutions are financing projects similar to yours. The local Chamber of Commerce may also be of help.

From this pool, choose a small number of potential lenders and arrange to meet their representatives. Before this meeting, make a list of what you are looking for in a business bank to help you evaluate their pitches.

Finally, entrepreneurs often report that they have the best luck obtaining a business loan if they establish a relationship with a bank well before they ask for funding.

What qualities are banks looking for?

The criteria that banks look at for loan approval are commonly known as the 5 C's: cash flow, collateral, capital, character and conditions.

Cash flow. Banking representatives will be looking for proof that you will be able to repay the money you borrow. One of the sources of this evidence is your firm's projected and historical cash flow, which may be generated by using free accounting software.

Basically, the lender will assess how much money you have left after you take care of costs such as rent, inventory, payroll and other expenses. The bank may also want to examine other financial statements, as well as your personal credit and - if you are an established business - your customer payment history.

Collateral. As part of the loan process, banks will ask you to offer some assets as an alternative way of repaying what you borrow. Although lenders are understandably cautious about loaning money, remember that collateral is a last resort for recouping the debt. Most banks would prefer to work out a payment plan.

Collateral may include real estate, equipment, accounts receivable or inventory. Some entrepreneurs use personal assets, particularly if they are just starting out. In addition, a lender may ask for a signed guarantee from someone who promises to repay the loan if you cannot.

Capital. If you are just starting a business, you have probably already saved a pot of money to invest in your firm, to convert idea to reality. Do you have sufficient equity in relation to your level of debt? You can use free accounting software to determine these figures, which are what a prospective lender will investigate when looking at capital. After all, the amount you personally have at stake is likely to reflect the amount of effort you are willing to devote to your company's success.

Character. Your parents may have advised you about the importance of making a good impression - here is your chance to put it to practice with your bank. Lenders will be looking at a variety of factors - such as your experience and education - to assess whether you will be successful and able to repay the loan.

Do you honor commitments? Are you trustworthy? Credit reports and references from business contacts are among the pieces of evidence that will be used to assemble an impression of your character.

Conditions. If you have already written a business plan, you may have already analyzed conditions within your industry, including risks. This analysis is part of what you will present to the bank.

The banker will look at what the loan is intended to be used for, as well as the current economic climate - both in general and within your specific sector. Be ready to describe how you would meet these challenges and respond to potential threats.

What do I include in a loan proposal?

When you approach a lender, it is important to bring a well thought-out loan proposal. This document should begin with an executive summary, which describes who you are, what your business does, how much you are looking to borrow, what you plan to do with the money and how you will repay the loan.

Next, provide a more detailed description of your business, addressing factors such as ownership structure, suppliers, location and plans for the future. Make sure you also include a management profile, outlining the qualifications of each owner and employee.

A market report discussing your customer base, competitors and how you plan to fill a niche will help demonstrate your knowledge of your place within the wider market.

You can use free accounting software to generate the accompanying financial statements for your proposal. If you are already established, balance sheets and income statements from the last three years are required, while start-ups can provide projected versions. Personal financial statements and details of collateral should also go in this section.