How Do You Get a Bank Loan?
Provided by Visa, Content Partner for the SME Toolkit
What Bankers Want to Know?
Don't be misled by the conventional wisdom that you always need to provide a business plan to get a loan. When evaluating loans, usually bankers want the answers to five questions: (1) How much money do you want? (2) What is the money being used for? (3) How will you collateralize the loan? (4) When are you going to pay me back? and (5) How are you going to pay me back? Most borrowers will be able to tell you the answers to these questions in a conversation and if they can't … that's a red flag.
The other key element in getting a bank loan is understanding collateral. Collateral refers to the assets that you pledge for the repayment of a loan. These assets can be your business's accounts receivable, inventory, or business equipment and they are used to secure the loan (versus an “unsecured” loan which has no collateral). In the event you default on the loan, the lender can acquire and sell the collateral. If a business does not have any assets worth securing, a lender will look to personal assets—for example, stocks or bonds—or some other form of personal guarantee. A personal guarantee means that the borrower guarantees repayment from personal assets, rather than from business assets.
Avoid having your spouse sign a guarantee unless he or she is active in the business.
Getting ready to seek a loan? Consider these issues before handing in your application.
- Be prepared to provide collateral or a personal guarantee.
Expect a request for either or both, especially if you're a first-time borrower. If you sign a guarantee, try and limit it to a one year guarantee that can be renewed if necessary. Avoid having your spouse sign a guarantee unless he or she is active in the business. If you have friends or relatives who are willing to guarantee your business loan but they're not willing to guarantee the whole loan, it could be because the guarantee requires them to be ‘jointly and severally' liable, meaning they must pay the entire loan if there is a default. To avoid this result and to encourage multiple guarantors, a guarantor can simply provide collateral for the portion of the loan they are guaranteeing. So if there are three guarantors, each may guarantee only one-third of the loan.
- Ask for enough.
One of the most common errors people make when borrowing is that they underestimate the situation and they borrow less money than they should. Once upon a time, there was a company who was making wooden furniture and doing a great job. They borrowed money from a bank and unfortunately they borrowed less money than necessary. When they went back to borrow more money, they found it was now more difficult because the bank was suspicious. Why hadn't they anticipated the right amount in the first place? And that made borrowing more difficult. By borrowing less than you need you haven't really solved the problem.
- Establish your company's creditworthiness.
Here's one tip for building your company's creditworthiness: Don't use a personal credit card for business purposes. That's the single rule that's violated most often. Most people have personal credit and they figure, well, we've got this card so why not use that to buy for the company. The problem is that it doesn't do a thing to help your business credit.
- Know your credit history.
Do you have a checkered personal credit history? How long has your business operated? (Businesses under two years old tend to be viewed critically.). Do you know your credit score? You can't fix it if you don't know what it is.
- Make sure your financials match up.
Don't provide financial reports that were printed at 3 a.m. the night before your meeting. Proof and review any financial documents used for a loan application with an accountant or financial advisor.
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