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What To Expect When Applying For A Traditional Bank Business Loan

Topics: Finance, Management

A traditional bank business loan can land you some of the lowest interest rates available on the market when it comes to financing options for your business. Why then isn't every business rushing to their bank and applying for a business loan?

While the headlines sound great, it's difficult to get approved for a bank loan. A Federal Reserve Bank of New York 2014 survey of small business credit found that only 39% of small businesses are accepted for bank loans. A 2015 NAV surveyfound that 42 percent of small businesses that applied for a bank loan were rejected more than once.

While successfully securing a bank loan is difficult, it's worth the effort to try. Here's what you can expect from a traditional bank business loan.

Application Process

While the application process can vary across banks, there are a few things you will likely see and should be ready for. Bank loan applications are time-consuming and heavy with paperwork. This includes the following:

Financial Statements - be ready to present detailed financial records for your business. This includes:

  • cash flow statements
  • balance sheets
  • net income statements

Loan officers will scrutinize your business to make sure that it is not only legitimate but also low risk. Banks want to reduce their risks as much as possible. Part of that process includes making sure business4e they are financing will be around long enough to pay back the loan.

Various ratios will be considered as well, including debt-to-equity, operating margin, current ratio and inventory ratio.

Business Plan - if your business is new, a business plan is a definite. It you have never created one, consider hiring a business consultant to help you with this task. Your business plan needs to be thorough. Have someone with business plan experience go through your finished plan and drill you with questions. The loan officer certainly will. You don't want any holes in your business plan that can lead to a letter of rejection.

For an existing business, a business plan may still be required. An existing business is often seeking a loan for capital projects or commercial real estate. This type of business plan most likely doesn't need to show as much detail about the overall business' viability. Instead, it will focus on how the business will repay the loan, its return on the project being financed and contingencies should the project not perform.

Tax Returns - have your tax returns in order. The last three to five years is normal. The bank will let you know how many years they may want.

Personal and Business Credit History - Your personal credit history will be taken into consideration. If your business has been around for over a year, its credit history will be looked at as well.

Business History

Business history is another term for time in business. Your time in business is an extremely important part of the application process. Since startups have no business history, they are unlikely to receive financing through a traditional bank loan.

Banks want to see that you have been paying your bills, managing cash flow, have good accounts receivable management and overall strong business history. 

Loan Terms

Traditional bank business loans have fixed terms. This means you'll know the payback period once the loan is approved. Your monthly payments and interest rate will be fixed.

Interest rates can range from 5% to 13%. Funds are often available in 10 - 60 days. Given the time it takes to receive funds, bank loans are often not good choices for cash flow shortages or working capital. Although, capital projects and commercial real estate purchases are great candidates for these types of loans.

Loan Requirements

Besides the paperwork mentioned above, you'll need a business checking account, which is not an issue for most business since they already have one.

Most banks will also require collateral. This can be in the form of equipment, real estate, or property such as a building. A down payment may also be required.

In some cases, you can get an unsecured loan. This type of loan does not require collateral. However, businesses that receive unsecured loans have a strong business history, credit profile and cash flow.

Conclusion

Applying for and receiving financing through a traditional business bank loan looks great on your business credit profile. It can lead to better financing terms with the same or different bank.

If you're turned down for a bank loan, a line of credit can be a great alternative. Lines of credit are open-ended. You make a monthly payment but don't have a fixed time that the line needs to be paid back. You can use the line as needed without having to apply for a loan each time. The interest rate will be higher than a traditional loan but it will help build your business credit, which can eventually lead to securing a traditional bank business loan.

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