So you’ve got big plans for your business – expanding your product line, opening a new location, or hiring more employees. But making those dreams a reality often requires some extra cash. Taking out a loan from your bank is a common option business owners look to for funding.
However, banks don’t just hand out money to anyone who asks. There are certain things they look at closely before approving a loan. In this article, we’ll break down the top 5 loan requirements of a bank, so you know what you need to do to boost your chances of getting a loan.
1. A Solid Credit Score
One of the first things a bank checks is your credit score. This number represents how reliable you’ve been with payments in the past. Most experts say you’ll need a score over 670 to qualify for a business loan.
Both your personal and business credit reports are pulled, so on-time bill-paying matters! Things like having low balances on cards compared to your limits, paying off debt regularly, and keeping accounts open for years all help drive your score up over time. Be proactive by paying down balances before applying if your score needs work.
2. Collateral You Can Count On
As security in case a loan isn’t repaid, banks will want collateral like equipment, real estate, or inventory you can use. This asset has to be worth more than the loan amount in case it needs to be sold to cover costs. Carefully consider what possessions are truly important versus what you could offer up if the worst happens. Make smart choices to avoid losing valuable things you need for operations.
3. A Well-Thought-Out Business Plan
Banks will want to see that you have a solid game plan for success. Your business plan should include thorough research on customers and competition and realistic sales projections demonstrating an ability to repay the loan over time. Link details in your plan directly showing how the requested funds would be used to boost business. Present clear thinking to convince banks of your potential.
4. Experienced Leadership
Having owners or managers with a proven track record in your industry means a lot. Include resumes that spotlight relevant work, skills, and past business wins. References or endorsements from others can reinforce your team’s talents if you’re new to running a company. Qualified guidance provides confidence that you’ll succeed.
5. Positive Cash Flow
Banks need to see money coming in exceed money going out so you can service the loan. Present conservative cost estimates that include unexpected expenses as cushions. A cash flow statement predicting regular surpluses ensures you’ll have funds to cover payments on time.
Types of Loans
Each type of loan has unique features, making it suitable for specific financing needs.
When seeking funds from a bank, it helps to understand the different types of loans available. Each has varying features suited to particular financing needs.
Here’s a table summarizing the different types of loans available from banks, along with their features:
| Loan Type | Description | Loan Amount | Interest Rate | Term | Monthly Payment |
| Term Loans | A fixed amount of money is repaid through monthly installments over 2-7 years. Suitable for equipment, vehicles, or long-term projects. | $10,000-$500,000 | 5-10% | 2-7 years | Principal and interest |
| Lines of Credit | It acts like a credit card with a spending limit. Ideal for fluctuating expenses or emergencies. Interest is paid monthly; the principal is paid at the end. | $10,000-$100,000 | Variable around 10-15% | Usually 1-year | Only interest |
| SBA Loans | Offered through banks with SBA approval for equipment, working capital, or real estate at lower-than-average rates, with the SBA guaranteeing a portion | Up to $5 million | Roughly 3-4% plus fees | Up to 25 years | Varies |
Final Thoughts
Choosing the type aligned with your timeline, intended use of funds, and ability to take on debt versus equity can maximize the financing best suited to power your business goals. Discuss options thoroughly with your banker.
Getting big decisions right takes preparation. With diligence in addressing these requirements, you’ll be in a strong position for approval. Remember – do your homework and don’t be afraid to ask for guidance! Following these tips can help turn your goals into reality with a helping hand from your bank.
Frequently Asked Questions (FAQs)
- What if my credit score isn’t great yet? – can I still apply?
Banks may still consider your request if your bad credit score is improving. Explain the work to boost it and provide more collateral. Ask about a co-signer too. Early talks can uncover options before your next score update.
- How much collateral do I need relative to my loan?
Ideally, collateral equals 1.5-2 times the loan amount. Discuss what you have with your banker. Lower equity may work if you demonstrate steady sales. The goal is to ensure repayment ability.
- What if my business is new? – do I need experience?
New ventures can still qualify. Highlight transferable skills and emphasize partners’ histories. Provide well-researched projections and clearly explain startup costs. Endorsements add reassurance too. Solid planning offsets less experience.
- Will getting turned down hurt my chances later?
Not necessarily. Rejections are good for your credit long-term. Lenders suggest improvements and then reapply once they are addressed. Banks appreciate seeing efforts to strengthen an application over time. Keep communication open.
- What if my cash flow is weak since I’m a new startup?
Discuss using personal assets or securing a government loan guarantee. Some lenders offer startup loans if the plan proves concept viability. Compensating for earlier uncertainty shows ongoing commitment.
