8 tips for approaching banks for finance
Approaching a bank can be rather intimidating so here are some tips to help you approach a bank for financing.
Why do you want the money. Before you approach any bank for financing you should have valid reasons as to why you want the money and be prepared to answer that question when looking for a loan. Some of the most common reasons that you want to borrow money from a bank is to pay off debts, buy equipment, vehicles, or buildings, to expand your business through more advertising, inventory, hiring new employees, etc. Before you go to a bank to borrow money you should try all of your other options first.
Check out different banks before deciding on which bank to go with. When looking at the different banks you should consider how financially sound the banks are, ask for their latest annual report, be sure to look at the financial statements from the previous year and ask the banker to compare their capital reserves to the requirements of the federal regulators. You should also ask for a sample loan package and look that over and ask the loan officer any questions you might have before deciding on which bank to go with.
Communicate with the bank about your business. Tell them about your business's history, your marketing strategy, the market conditions for your business, what you want to accomplish in the future and your historical financial results, be sure to include a profit and loss statement and your cash flow. When talking to the bank if you are unsure about exact numbers always err on the conservative side. You should also provide the bank with examples of your products or services as well as why you are qualified to run the business.
Before you make an appointment with the loan officer at the bank you should see if you can set up a time to go to lunch so that you are in a neutral territory when you are first discussing your plans this can help set you at ease so you can give your presentation better. When meeting with the loan officer be sure to bring a one page business plan summary and a loan request. Some information that should be included on your loan request are how much money you are looking to borrow, what you plan on using it for, how long you want the loan for, how you will pay the loan back, and what options you have to pay back the loan if your revenue is not enough to cover the monthly payments.
You also need to realize how important cash flow and credit is because the bank is going to want their money back and will expect payments to be in a timely and regular manner. Some things that bankers look for in good loan applicants are:
- Capacity - your ability to repay
- Character - whether you use discipline and keep your promises to repay
- Capital -how much have you and others put into your business
- Conditions - how is the industry you are in doing as a whole
- Collateral - what you are willing to put down to secure the loan
You also need to be knowledgeable about the various types of loans that banks issue. Here are some of the more common types of loans:
- Short-term loans - one year or less
- Working capital loans - used to cover your cash needs after you sell your product but before you get paid
- Seasonal loans - paid off at the end of your business season
- Term loans - terms are from one to five years and are usually used to purchase equipment
- Long-term loans - more than five years in length usually used for buildings or buying a franchise or other business
- SBA loans - repayment is partially guaranteed by the United States government
Learn how banks actually make their decisions on if they should give you a loan or not. Some things that banks look for before approving your loan are:
- The 5 C's that were mentioned above
- Marketing strategy
- Your determination
- Financial projections that support your marketing strategy
- How much they can make on your proposed loan
- What you will do with the money
- What kind of security you can put up
While the bank calls the final shots on if you get the loan or not there are still some things that you can negotiate with the bank, this is actually easier if you have done your research on more than one bank.
- Interest rates
- Length of loan
- Personal guarantee, but this should be used as a last resort
- Collateral, you don't want to use personal collateral unless you have no other options, but you never want to put up your house
- Shop around; you never know when or where you are going to find a better rate.
After you have been approved for the loan you should have your accountant or somebody similar review the loan documents to be sure that it is in your best interests. After agreeing to the papers you now must close your loan.