Small Business Bank Loan:

Hopefully, you are already at the point where you are looking for funds to start or expand your business. Because of the high cost of setting up a business, determining how you will finance your business is pivotal. According to experts, loans are a time-tested way of raising capital for your business.

• Decide how much money you need:

This is an straightforward but often misunderstood statement. In theory, entrepreneurs, particularly start-ups, when budgeting for their business often focus on what they will need to get their business going, or to finance a particular project without accounting for working capital or cash for contingencies. Fact remains that this is dangerous proposition due to lack of working capital can mean the death knell for the business.

Moreover, some entrepreneurs, again start-ups, drastically overestimate their costs. Following this mechanism will make lenders not only to question the entrepreneurs assumptions, but also question whether they know what they are doing.

Now that you are through on an amount, lets focus on the lender.

a) If you are a start-up:

Loan amounts below $25,000 can be termed as smaller, micro-loans. It is worth pointing that not all banks will be interested in doing a SBA guaranteed loan for small amounts. As a matter of fact, micro-lenders and alternative-lenders are better equipped to handle this type of loans. In theory, these lenders usually make smaller loans and have a community focus. It is advisable to look to credit unions, local development corporations and other non-profit lenders.

A Small Business Administration (SBA) guaranteed loan can be described as a guarantee to the lender. In this scenario if the borrower defaults, the lender is guaranteed repayment of a portion of the loan by the SBA. As a matter of fact you are still liable for the loan, so your obligation does not go away. An amount of $50,000 and above is the usual range for SBA loans. It is worth noting that the higher the amount requested the more the lender would look for collateral to secure the loans. Start-ups and existing businesses can give a green signal for SBA guaranteed loans.

b) If you are an existing business:

On the other hand, if you own a company that has documented sales (you will need to show previous years tax statements) then you can apply for conventional bank loans. If experts are to be believed, these loans are usually easier to apply, and may have lower interest rates. Generally for a conventional bank loan, you will need to be in operations for at least 2 years.

c) Set your expectations:

Always remember the fact that the bank does not want to own your business. Thats why, it is highly unlikely that you will get a loan for a 100% percent of the project cost. You will require to put down a co-payment. Though the minimum co-payment varies by industry and lender, expect to put down at least 20%-30% or more of the cost of the project.

• Find out your credit score:

According to experts, you should check your credit score and look over your credit report to make sure there are no problems. It is worth pointing in this regard that a credit score of above 650-680 is considered Good, but it does not mean you will get a loan. On the other hand, a credit score in the 700-800s is very good and increases your chance of getting approved. Moreover, you can request your credit report from one of the reporting agencies, or use one of the many online services available to check your score.

• Start researching your options:

Its very important that you start weighing all your options. Its your responsibility of think of ways to strengthen your loan application. Can you search a co-signer Bring in a partner with good credit or experience Invest more cash into the business If you are pretty much convinced that you are not a strong candidate for a business loan, you can present the lender with options to increase your chances.

• Start writing the business plan and create the financial projections:

Always remember that the business plan is more than a planit is a tool that helps you evaluate your business concept, your product or service, and discusses how to implement your ideas. According to experts, a business plan is also a tool to obtain investors, lenders, and strategic partners. In theory, you can find many resources and opinions on the Internet as well as your local bookstore on how to build an effective business plan. It is worth noting that a lender will usually require a comprehensive business plan as well as a projected 1-year cash flow projection (month-by-month), 3 years income statements, a balance sheet, a statement of sources and uses of funds, and a loan amortization schedule. One mistake that usually occurs is that the figures on the Business Plan do not match the figures on the financial projection. Thats why, double-check your work before sending it to the bank.

• Find a lender

Finding the right lender is quite a difficult task; each lender has its own criteria for lending.

a) Commercial Banks

Theoretically speaking, banks are one of the largest Small Business lenders but their approach to lending varies. As a matter of fact commercial Banks decisions are based on your strength as a borrower (a good credit score, personal financial statements, experience and collateral) the banks goals for the period and their lending philosophy. It is worth noting that banks may be looking to expand their Small Business Loans consumer base; others may focus on larger loans or a specific industry.

According to experts, you will need a high credit score if you are applying for a bank loan (with or without the SBA guarantee). Although, this is not a preset rule for all banks, but its mandatory that a credit score over 700 is a better predictor on the success of a loan application. The bank may opt for collateral (home equity, saving, etc) if you are applying for amounts over $50,000.

Always remember that the borrowers personal financial situation is key for the application. As a matter of fact, the banks underwriter will analyze the persons net worth; as well as look at her previous earnings, length of credit history, among other factors. Moreover, for lower amounts the bank may not require a business plan. Though, if there is a particular weakness in the loan application, the loan officer may ask the borrower to submit a business plan and financial projections.