The challenges of obtaining a small business loan continue to frustrate budding entrepreneurs and as well as established small business owners alike.
Small business loans are generally defined as those seeking credit of $1 million or less. Financial institutions are less likely to lend in today’s environment and the reasons are many – a still weak but slowly improving economy, tightened bank underwriting standards, ever changing bank regulations, and or increased fear or skepticism with lending to newer firms or start-up businesses.
According to a July 2012 study released by Victoria Williams of the Small Business Administration (SBA a U.S. Government Agency), the number of small business requests decreased 5 percent last year.
This decrease is partly due to the uncertain economic conditions that cause lenders to remain cautious about originating new loans and cause small businesses owners to be more hesitant in acquiring more debt.
For those of you that have not given up looking for that loan, there are things you can do to assist you in your search for that small business loan. First, be prepared with current and historical information on your company or your idea. This information should include financial data, tax returns, and or forecasts for new companies.
You should be able to support your forecasts or budgets and demonstrate an ability to repay the loan. Next, check your personal credit. Make sure you understand what is being reported and correct items that appear in error. The chances of obtaining a small business loan are low if you have personal credit issues.
Review your tax returns, both business and personal and understand that the financial institutions are looking for positive cash flow. If your tax returns list continuing losses or demonstrate negative cash flow, you may be challenged in your loan search. Lenders know how to dissect tax returns to find cash flow, but if you continually manage your taxes to minimize your tax obligation, you may be asked to provide a lot more information. Know what kind of loan you are seeking (e.g. a line of credit or a term loan.)
Lastly, but certainly not the least of many items, have and maintain a banking relationship. You have to demonstrate that you are financially responsible and that you have an established banking profile with a financial institution. If not required to do so by the lender, you can offer to move this relationship to the lender as part of the loan application. Financial institutions do not typically view applications favorably where there is no established banking history (personal or business).
Overall you have to demonstrate that you are knowledgeable in your trade or business. You should demonstrate that you have a history of financial responsibility (credit, taxes, banking relationships) and prepared with data that supports your loan request and a capacity to repay the loan.
Editor’s note: Al Hernandez is a Senior Commercial Banker with Los Alamos National Bank and currently runs the Albuquerque market for the bank. Al has over 23 years of banking experience that includes running banks and commercial lending.
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