Qualifying for a small business bank loan

Whether your company is a hi-tech Internet start-up or an established manufacturer, extra financing is sometimes necessary to propel your business to the next stage of growth. Enter the small business loan. Offered at lower interest rates than a line of credit, commercial loans can provide an attractive resource for many expanding businesses.

A loan won't fall in your lap, though-obtaining a commercial loan does require a good deal of legwork and preparation. That's because your ability to secure a loan greatly depends on how well you present your company to your prospective lender.

Be prepared to have several key documents on hand before you even set foot in a bank. These should include personal financial statements, tax returns, monthly cash flow projections, and a well-prepared business plan. Established businesses should also produce references from suppliers and customers.

In addition, it's essential to be able to supply a well-organized plan of how you intend to use the loan. For a start-up company, this might involve listing the expenditures and inventory that you need to purchase. For a manufacturing firm looking to purchase a building, this might entail explaining what the building will be used for and how it will be used to increase revenue.

As a general rule, banks will never provide 100% financing. Start-up companies typically must contribute at least 25 to 35% of the costs. Contribution requirements can vary, however, depending on the stability of the business and the value of the collateral used to secure the loan.

While providing more collateral is one way to increase your chances of securing a loan, additional alternatives can help to reassure a reluctant bank. The U.S. Small Business Administration works in conjunction with banks to guarantee a variety of loans for small businesses. SBA loans are especially advantageous to businesses that have tight cash flow, as the terms of such loans can often be extended far longer than those of a comparable bank loan.

You can also improve your chances by finding out who will make the final decision regarding your loan. While this decision may fall into the hands of the bank officer you deal with directly, more often than not it will be made by a boss or a loan committee that relies on the bank officer's ability to tell your story. If the bank officer that you're dealing with has little lending experience, it might work to your advantage to schedule a second meeting and ask to have a higher-level officer involved.

Since guidelines on the types of loans processed differ from bank to bank, your best bet is to first turn to the bank with which you already have an existing relationship. In addition, local businesses, attorneys, and accountants are other good resources for a lender referral.

How much will the loan cost? Established businesses with excellent credit can expect to pay back the principal plus Prime. Start-ups should factor in the principal plus an additional 2 to 3 % above Prime. Moreover, SBA loans charge an upfront fee of 2% to 2.75% of the of the portion of the principal that they have guaranteed.

Quick tips

•If your credit history is less than stellar, a bank officer is more likely to be understanding about an accident that kept you out of work than an ongoing habit of overspending on credit cards.

•Pay attention to early repayment penalties. Some banks charge a 2% to 5%-plus penalty if you decide to repay the loan early.

•Limit your inquiries. Since each request for credit shows up on your credit report, apply to no more than one bank at a time.