What to expect when applying for a business bank loan

You have an idea and want to start a business. You need to borrow money and decide to go to a bank for a business loan.

Well, you may find out there are certain things the bankers will want from you besides just a completed application.

It’s been said that banks only lend money to people who don’t need it. What does that mean?

My interpretation of that is banks lend money to people who are most likely to pay them back.

Businesses all have risks associated with borrowing money, but startup businesses are usually the riskiest. Bankers must look at financial projections and determine whether they appear realistic.

The first thing you may be asked for is a business plan, and three years of financial projections if you are starting a new business. The first year of the projections should include a monthly breakdown of your projected income and expenses, and two subsequent years of just the total income and expenses. In addition to the income statement, you’ll need a balance sheet, cash-flow spreadsheet, a sources and uses-of-funds statement, an amortization statement of your loan request, and a depreciation schedule. Fortunately, resource organizations like the SBDC, SCORE and WISE, which are funded by the U.S. Small Business Administration (SBA), are available to assist you with the business plan and financial projections.

As a rule of thumb, banks will want you to have about 20 percent equity, or “skin in the game” as they refer to it. Equity can be cash, or assets already purchased, that you have when you start the business. Without any equity, or some cash to start, it will be nearly impossible to obtain 100 percent financing for a startup business.

Having a clean credit history, and credit score is extremely important. Again, banks make loans to get paid back with interest, not to repossess assets. So, they want to see how you handled your credit in the past. Credit scores of about 640 or higher are in the range that is most favorable. Certainly, some credit problems have valid explanations and the bank may take that into consideration.

Having collateral, or a secondary repayment source, is another requirement that most banks will seek from a borrower. Usually a lien on “most assets” will be taken, but the value of collateral is not what most borrowers think it should be. The bank may also request that you put up personal assets as collateral. Be aware of the fact that your collateral is not worth the same amount of money you paid for it.

An SBA guarantee may be required on your loan request. The SBA can provide a guarantee of part of the loan proceeds to the bank. Let’s use a 50 percent guarantee on a loan of $20,000. That means the bank will get repaid $10,000 from the SBA if the borrower cannot repay it. This reduces the bank’s exposure to only $10,000 and may induce the bank to make a loan that it otherwise would reject. Regardless, borrowers still owe the total amount borrowed, and a default will negatively impact their credit history.

Business owners also have other lenders to consider besides commercial banks. Credit unions increasingly make loans to small businesses and will especially try to accommodate their own customers.

I would caution anyone looking online for businesses that offer easy money for startup businesses as that could come at a high interest rate and may include some hefty fees as well.

Other forms and information may be requested that can vary from bank to bank, but most lenders will want the items I discussed above.

So, save your down payment, make sure your credit score is in the acceptable range, visit a business advisor, and then talk to your bank. At least now you know what to expect.

Michael Cartini is a business advisor at the Small Business Development Center (SBDC) at Onondaga Community College. Contact him at (315) 470-1973 or email: m.j.cartini@sunyocc.edu