Small business owners don't always have an easy time getting a bank loan. Our content partner Opportunity Fund explains how you can maintain good financial standing as a borrower and eventually graduate to bank lending for your business.
Q: What should borrowers know about the bank loan process?
A: You can’t walk into a bank, sign your name on the dotted line, and get a $100,000 line of credit anymore. Banks are looking for specific things: time in business, FICO score, and overall profitability of a business.
Q: How long does it take to build a good business profile for a bank loan?
A: Banks are looking for at least three years in business, plus traditional profitability, year over year growth, and no major landmines in your credit history like bankruptcies and loan modifications. Many times defaults on a bank product, like a checking account or a credit card, are instant disqualifiers. If you have a small business with annual revenues below one million dollars, you must personally guarantee any loan you have.
Q: What are some other key attributes that bank loan officers look for in a successful candidate?
A: Industry plays a big role. Small business owners in high risk industries like restaurants, manufacturing, trucking, and construction face challenges in bank financing. An ideal candidate for a bank loan comes from professional industries, like medical. A clean balance sheet with a business profile gives a business owner the best chance of getting a bank loan.
Q: Can you share some do’s and don’ts for borrowers who are trying to become ready for a bank loan?
- Know your credit score and your recent credit history very well. It’s a major determining factor for loan eligibility and building credit worthiness.
- Understand the type of financing that you’re looking for: term financing, a line of credit, or equipment financing, for example.
- Do your research on available loans and how it connects to the type of credit profile that you have.
- Set expectations for yourself and your business. A borrower who wants a low interest rate loan but has a bankruptcy within the last five years will likely have better chances with an alternative lender versus a bank. Alternative lending doesn’t necessarily mean high risk or cost, or even predatory. It means that you must be open to paying a little more as your business risk profile is higher than average.
- Take advantage of resources to help prepare your financials. Work with someone who knows what banks are looking for in small business lending. A good CPA or even a bookkeeper can help. Other nonprofit and community resources, like the Small Business Development Centers, have programs specifically for small business owners. You can get credit counseling or information on lending through these resources.
- Don’t rush into the process. It’s easier than ever to find financing right now, but there are high cost and predatory type lenders out there looking for borrowers who are willing to take the path of least resistance. Most of the time it’s against their own best interests as a borrower.
- Don’t expect that a personal connection to a bank will help you get a business loan. Start rethinking the way banks lend to people and the banking relationship as it relates to the bank lending requirements we discussed here.
Q: Can you share your background in banking and where your perspective comes from?
A: Before coming to Opportunity Fund, I spent almost 10 years in commercial finance as a business banker at Wells Fargo and a relationship manager at JPMorgan Chase in Northern California. I worked at Wells Fargo during the financial crisis of 2008 and saw how the credit crunch impacted small businesses looking for access to capital. At Chase, I had many clients asking about what they could do to become bank loan ready. At that time there weren’t many options for these borrowers and they lacked a clear path to growth. I was part of a group that started working with Opportunity Fund. For the first time ever, we had a way to help our clients who didn’t qualify for a bank loan. It made me think about how cool it is to do what a traditional financial institution can’t.
For information about Opportunity Fund’s small business loans, please contact us at (323)720-9123 or firstname.lastname@example.org