Most small business owners will, at some point, approach a bank or other lending institution to borrow money to expand their operations. Unfortunately, many fall victim to common but potentially damaging myths about applying for business loans, including:
- Lenders are lined up and eager to provide money to small businesses.
- Banks are willing sources of financing for start-up businesses.
- The company speaks for itself when seeking financing.
- All banks are the same.
- Banks, especially large ones, do not need or want the business of a small firm.
- Loans are obtained simply by persuading a lender to provide funds.
A 2014 working paper, The State of Small Business Lending: Credit Access During the Recovery and How Technology May Change the Game, reported that many business owners relied on major banks, regional banks, or community banks as their primary financing partners.
Banks remain an important potential source of business credit. Understanding what a lender looks for and how to approach the process can make a difference between securing financing for expansion and having to search for alternative sources of cash.
Table of Contents
- A Mile in the Banker’s Shoes
- Picking a Local Favorite
- Realize the Value of Building Relationships
- Enter with a Silver Platter: Preparing a Loan Proposal
- What to Do Before Applying for a Loan
- Final Thoughts
A Mile in the Banker’s Shoes
To present yourself as a trustworthy businessperson who can be relied upon to repay borrowed money, you need to understand the basic principles of banking. Your chances of receiving a loan may improve when you view your proposal from the banker’s perspective and appreciate the responsibilities lenders must manage.
Banks have obligations to regulators, depositors, and the communities they serve. Although a bank’s cautious approach may sometimes frustrate a small business owner, it helps the institution manage risk, protect depositors’ funds, and maintain financial stability.
Lenders therefore need more than a promising idea. They need evidence that your business is well managed, that the loan will be used appropriately, and that there is a credible plan for repayment.
Picking a Local Favorite
Banks differ in the types of financing they offer, interest rates, willingness to accept risk, staff expertise, services, and approach to small business lending.
When choosing a bank, consider institutions that understand your industry and are equipped to support your business’s current and future financing needs. Some lenders focus on particular business sizes, sectors, or types of loans.
Consider the following when comparing banks:
- The types of business loans and credit facilities offered.
- Interest rates, fees, repayment terms, and collateral requirements.
- The lender’s experience with businesses similar to yours.
- The availability of business banking services and ongoing support.
- The lender’s application process and communication with business customers.
Some banks may prefer to lend to businesses that already maintain accounts with them. Ask each institution about its requirements rather than assuming that every bank follows the same policy.
Your accountant may be able to help you assess your financing needs and compare banking options that offer suitable services and value.
Realize the Value of Building Relationships
Devote time and effort to building a professional relationship with the bank you choose. If possible, get to know the business banking team or loan officer before you urgently need financing.
Preparing for a future loan request should begin well before the money is needed. Approaching a new bank during a financial crisis may limit your options, especially if you have not maintained clear financial records or established a banking relationship.
Lenders are generally concerned with minimising risk. They may feel more confident working with businesses whose owners communicate clearly, maintain reliable records, and demonstrate responsible financial management.
Build trust by:
- Keeping business accounts and financial records organised.
- Making loan repayments on time and meeting the terms of existing agreements.
- Communicating early if financial difficulties arise.
- Providing accurate information and responding promptly to requests.
- Maintaining a realistic business plan and reviewing performance regularly.
A strong banking relationship does not guarantee that a loan will be approved, but it can help the lender understand your business and evaluate your application more effectively.
Enter with a Silver Platter: Preparing a Loan Proposal
Lending is a core part of banking, and well-managed loans can benefit both the lender and the borrower. Understanding what a loan officer needs to assess—and providing supporting evidence—is one of the most effective ways to prepare for a loan application.
A sound loan proposal should answer the following questions:
- What is the specific purpose of the loan?
- Exactly how much money is required?
- What is the primary source of repayment?
- What evidence supports the assumptions behind the repayment plan?
- What alternative source of repayment is available if the business plan does not go as expected?
- What business or personal assets could be offered as collateral, if required?
- What evidence demonstrates the competence and ability of the management team?
These questions highlight why preparation matters. An experienced loan officer may examine each point in detail. Being unable to explain your business needs or support your financial assumptions may weaken confidence in your application.
What to Do Before Applying for a Loan
Before approaching a lender, prepare the information that will help the bank assess your business, its financial position, and its ability to repay the proposed loan.
1. Write a Business Plan
Your loan request should be supported by a clear business plan. This document is more than a tool for obtaining financing: it helps you examine, evaluate, and plan the major aspects of your business.
A useful business plan should explain your business model, products or services, target market, competitors, management, operating requirements, financial projections, and growth strategy. It should also show how the proposed loan will support your objectives and how the business expects to repay it.
After completing the plan, prepare a concise executive summary that outlines the opportunity, funding requirement, and expected results. A short summary can be useful when a lender requests an initial overview of the proposal.
2. Prepare Historical Financial Statements
Your business’s financial history helps a lender understand its performance and current position. Prepare accurate financial statements, including income statements, balance sheets, and cash-flow information where available.
Financial statements prepared or reviewed by a qualified accounting professional may help provide greater confidence in the information. The level of independent review required will depend on the lender and the type of financing.
You should understand your financial statements and be able to explain how the business operates, where its revenue comes from, what its major expenses are, and how its financial performance compares with expectations.
If your business is new and has limited historical information, prepare realistic financial projections and clearly explain the assumptions behind them.
3. Line Up References
A lender may want to contact your suppliers, customers, business partners, or professional advisers to learn more about your business and its reputation.
Identify suitable references in advance and obtain their permission where appropriate. Be ready to provide accurate contact details when requested, and let your references know that the lender may contact them.
Respond promptly to requests for references and other supporting information. Delays can slow the application process.
Final Thoughts
Approaching a bank for a loan can be stressful. You are opening your business to scrutiny and may face questions, criticism, or rejection. Understanding the evaluation process and preparing thoroughly can help you address concerns and present your business more confidently.
Sometimes an application may be weakened not only by a genuine business problem but also by a perceived weakness that has not been explained properly or supported by evidence.
Before applying, make sure your financial information is accurate, your loan purpose is clear, and your repayment plan is realistic. Be open about risks and explain how you intend to manage them.
Do not hesitate to consult your accountant or financial adviser when you have questions. Their experience may help you prepare the necessary documentation, understand your financial position, and approach the lending process more effectively.
Editorial note: This guide contains general information about life insurance. Some examples, cost assumptions, product descriptions, and references in the original article may be dated or vary by insurer and jurisdiction. Review current policy documents and consult a qualified insurance or financial professional before making coverage decisions.
