Business Loans

Business Loans 101

We've all seen the ads and heard the commercials. "Lowest interest rates! Easy financing! Yada, yada, yada..." It comes from everywhere; from both the big banks to the small brokers. And we are fooled into thinking that rates are the most important thing to look for in a business loan. But what's the real story?

As a small business owner, what do you need to know when you decide to get a business loan? The following is a short checklist I've created over my 15 years in the banking industry. It is my opinion of how you should approach the process of getting a loan. Follow these guidelines and your application experience will be smoother and more successful.

  1. Ask for a loan before you need it. It sounds counterintuitive, but lenders prefer to lend to people who already have money in the bank. They want to make sure clients can pay them back and that they know how to properly manage cash. Generally speaking, every small business owner should take the time to build business credit. Your business is an individual entity that, just like you, has a credit rating. And just like you, your business is judged and valued by how it has used credit throughout its life. The more you have exercised your credit the better the rates and offers you get. Think about the first credit card you ever received. Remember how high that APR was? If you've managed your credit well over the years, that starting rate is nowhere near the lower rate you currently enjoy.

  2. Leave your ego at the door. Just because your business is successful does not give you any leverage with your local bank. Despite the hand shakes, smiles, free stress balls, and fee waivers now and again, all banks and alternative lenders are regulated by the government. They have a baseline set of rules that they must follow in delivering their products and services. You need to be aware of those rules in order to successfully do business with those institutions. This is not to imply that all banks and lenders follow the same restrictions (only the baseline rules), so be informed and shop around.

  3. Interview multiple lenders. This is a very important step, although it's one not enough small business owners take. Not all banks and alternative lenders are created equal. Although the rules of lending may be universally similar, each bank and lender has a particular appetite for certain types of businesses. Speak to the loan officers and ask questions. Not just about the rules of the bank, but how that loan officer works. You need to find yourself someone who will be your partner in developing you business credit. In getting you the loan you need. DO NOT give them your Social Security Number or EIN to run a credit check until you have decided that they are the right fit. {{There is a great article by Brayden McCarthy of Fundera that goes into what pricing should really look like.}}

  4. Know their role. The two most important people to recognize when you are looking for business lending are the loan officer and the underwriter. The loan officer is the bank or lending sales agent. They are commission-based, and as such their job is to sell you on why you should do business with them. They have a financial interest in trying to get you booked. (Notice I didn't say "get you what you need." Refer to #3, and interview them before anything begins.) The second person is the underwriter, who is usually salaried. Their job is to give out money to businesses that meet the lending criteria set by the bank. Every time they approve a credit application, they take responsibility for the life of the loan. If the loan goes bad, it is a negative hit on their track record. Depending on the severity of the lapse and how often it happens, the underwriter can even lose their job. The checklist they complete while processing your application is the only thing they can hold up and say "not my fault" if your loan goes south. That's why they are so tough on guidelines and policies.

  5. "No" is not an end, but a beginning. Contrary to popular belief, if you go through the application process and get are turned down, that's a step in the right direction. Instead of seeing "No" as an end to the application process, simply view it as a note from the underwriter stating, "Please complete the following so I can approve your application." If you have chosen your loan professional the right way, they'll help you create a plan to meet the requirements. Stick with them, as the second application is sure to be easier. The records will already be on file and they'll review the new information you provide. Remember, the underwriter is trying to complete a checklist of requirements, so help them do it.

Getting a business loan, or line for that matter, is something that needs to be planned out... even built into your initial business plan before you launch. Preparing and planning in advance will help you achieve your goal and protect your business cash flow during the unavoidable rough patches. As the saying goes, "Forewarned is forearmed."

Until next time,