If you need financing for your small business and are considering a commercial bank as one of your potential sources of financing, your likelihood of getting a loan depends on a few different factors:

• Your personal financial history and credit rating
• Your history with a particular bank
• The purpose of your loan request
• Your experience in managing a business, particularly the business for which you need financing
• Your personal investment and commitment to the business
• How you intend to repay the loan
• Your preparedness and ability to convince the lender that you are a good credit risk

Your personal financial history and credit rating

Your personal credit score will be an important factor if your small business is a sole proprietorship, and especially if you are just starting out with your own business, since this may be the only basis on which the lender can evaluate your ability to repay the loan. Your personal financial history will be reflected in your present credit score.

Your history with a particular bank

You will most likely have a better chance of getting a small business loan from a bank that knows you personally. It may be a bank where you have a checking account, credit card, overdraft protection or line of credit, auto loan, home mortgage, or other bank products. If you have been with the bank for a number of years, and they can verify that you have been timely in meeting payments on other types of credits and loans, your chances will improve considerably.

The purpose of your loan request

Lenders like to have assurance of your ability to repay, and therefore they want to know how the proceeds of the loan will be used. If you can provide a strong case that your business has the potential to generate sufficient cash flow to repay the loan, your chances of getting the loan are greatly improved.

If the loan is for purchasing property or capital goods, such as equipment, to get your business started, you may be able to offer these as collateral. This provides the lender with additional assurance.

Your experience in managing a business

Demonstrating to a potential lender that you have experience and expertise in your trade or business, and that you have the necessary entrepreneurial and management abilities to run a business will give a potential lender more confidence.

Your personal investment and commitment to the business

A lender will most likely expect to see that you have your own resources invested in the business. This shows that you are serious about the endeavor and are committed to making it a success. The amount of equity that you should have invested depends on the nature and the size of the business, but you can expect lenders to require you to have at least a 10% equity interest in the business.

Your willingness to provide a personal guarantee for the business loan will also give lenders more assurance of repayment, since they will have more recourse than just the assets of the business.

How you intend to repay the loan

This is obviously the key factor in getting the loan, and represents the convincing argument you will need to make. Your ability to repay is a function of the aspects previously mentioned, and all these aspects will be taken into consideration. The point here is to show, in tangible form, how you expect to generate the cash flow necessary to make the loan payments on time.

If you are requesting additional financing for an ongoing business with demonstrated profitability and a good repayment history on previous loans, potential lenders will probably feel more comfortable with extending you the credit than they will if you are just starting a new business without a proven track record. If yours is a new business, you will need to show that your idea is feasible, based on data on comparable businesses or industry statistics. But it will come down to showing how you intend to generate the necessary cash flow to make the payments.

Your preparedness

A general description of your idea for a business and a request for a general amount of financing will not be enough to get you the loan. You will need to show the potential lender that you have done your homework.

First of all, you should be clear and specific about what you are requesting. If you need consulting and advice about how much financing to request and over what term, you should obtain this advice before going to a lender to request a loan, unless you are confident that your bank can offer you business advice and counseling, and then talk about a loan.

What are you asking for?

Are you looking for a short-term loan?

• Do you need the loan to finance your start-up costs? How much do you need, and how will you spend it? Will it be for attorney fees, legal expenses, licenses and permits, and other organization costs to set up your business?
• Do you need the loan for working capital, to finance your business operations for a few months until you start generating sufficient revenues to cover your expenses (and make a profit)?
• Do you need a loan to expand your business or take advantage of opportunities in your market? In this case, you will have some history to present to the potential lender, and you will need to show how this expansion or new opportunity will generate more profits and more cash flow. If you are expanding into a new line of business, you may need a marketing study.

Are you requesting a long-term loan?

• Do you need the loan to purchase real estate, property, installations, vehicles, machinery, and other equipment? Have you identified what you need to purchase, and do you have quotes on prices? In this case, you will need an idea of the term of the loan. Loans for real estate and property, for example, may be secured by a mortgage, with terms of up to 20 years, while a loan for equipment would probably have a much shorter term.

Managing debt

It will be important to think carefully about the amount you are requesting, and over what term you want to repay the loan. It may be tempting to extend the loan over a longer term and thereby reduce your monthly payments, but you will be paying a lot more interest over the long run, thus cutting into your business profits and reducing your return on equity.

At the same time, you want to ensure that the amount you are requesting will provide you with sufficient financing. Almost enough financing will probably not help you, and may actually keep your business from having the resources it needs to generate enough cash flow to repay the loan.

You will want to have sufficient leverage in your business to adequately manage operations and avoid liquidity problems. But you should not overburden your business with debt. If you do, your profits and cash flow will go toward paying back loans and not toward reinvestment in your business. This can affect your ability to continue making payments in the future on existing loans. It will therefore be more difficult to obtain even more loans. Your debt to equity ratio should be kept as low as possible, without losing an adequate degree of leverage.

Your business plan

Hopefully you will already have a written business plan when you go to request a loan. Having gone through the exercise of documenting the business plan will leave you much better prepared to explain your business, how you intend to manage it, what your projected income and expenses will be, how soon you expect to start generating a profit, what your cash flow will look like, and finally, how you intend to repay the loan.

If you are requesting additional financing for an ongoing business, you can still refer to your business plan when you are requesting a loan, and make the necessary modifications and updates.

Loan proposal

Preparing a written loan proposal will also make you better prepared, and will improve your chances of getting the loan. Much of the information that goes into a loan proposal is information about your business and can probably be taken from your business plan. In addition to general information about your business, a loan proposal includes specific information about the amount and purpose of the loan you are requesting.

A well-written loan proposal should contain the following:

General information about your business

• Business name, address, telephone numbers, names of ower(s) or partners
• Nature of the business – a description of the line of business and activities
• Ownership and legal structure of the business
• History of the business – when it was started, any changes in ownership, growth and expansion
• Evidence that your business has the necessary permits and licenses to operate in your line of business

Information about the management

• Identification of key management, showing their background, experience, abilities, and qualifications, especially as they relate to the business (you may want to include personal resumes)

Market information

• Clear definition of the products or services being offered
• Principal targeted market (if yours is a niche market, you should describe it)
• Main competitors
• Marketing strategy
• Competitive advantages of your business

Financial information

• Balance sheets and income statements – actual, if your business has a history, and projected, if you are just starting
• Cash flow statements (actual historical cash flow statements, if applicable, and projected cash flows, whether yours is an ongoing or start-up business)
• Tax returns, for an ongoing business

Specific information about the loan request

• Purpose of the loan - what it will be used for and why it is needed
• Amount required
• Term of the loan (short-term or long-term)
• Collateral you are willing to pledge as security for the loan
• Personal guaranties you are willing to provide

Final Note

When requesting a loan, you should try to put yourself in the potential lender’s position. You know your business, and are confident about its results and your ability to repay the loan. You need to convey that same confidence to the lender. Your enthusiasm about a new business you are just starting up, or about your plans for expansion or a new opportunity is an important factor. But lenders are in the business of making loans that will be repaid. You should also keep in mind that the person you are dealing with (a loan officer) probably has to make an objective case that will be approved by someone else. So if you can back up your enthusaism with as much hard data as possible, you will greatly improve your chances of getting the loan and getting on with business.