How to Get a Business Loan in Five Steps. A lender looks at a loan request in three sections known as the “three C’s”. They are:
* Credit: Did you pay previous lenders back as contracted?
* Capacity: Can you afford to pay back this loan?
* Collateral: If you don’t pay back the loan from what asset can the lender recover their principal?
Step one is:
1. Identify your strength and weaknesses in the “3 C’s”. Do this as would a lender – with a very critical eye. Identify your loan to value ratio and your debt service coverage ratio. If you have reason to believe that your credit is less than sterling, get a copy of your credit report including your credit score. Each lender has different criteria with the cost of the loan being higher as your strength in the “3 C’s” is lower.
Step two is:
2. Identify lenders who lend to your level of borrower and to your industry type. Call lenders to get their criteria. Learn about the SBA 504 program and 7A loan guarantees. Find who others in your industry have used for financing.
If there is a gap (not a canyon, just a gap) between your borrowing ability and lenders’ criteria, a loan broker may be able to help. They spend their working hours finding second and third tier (more aggressive and more expensive) lenders and establishing relationships with them. They can act as a salesperson for your project in ways that you, as a principal, cannot.
3. If you cannot find lenders on your own, consider hiring a commercial mortgage broker. Be careful – in many areas there is little or no protection under the law for commercial transactions. While a small upfront fee (a couple of hundred dollars or less) for out of pocket expenses is reasonable, shy away from any that want large upfront payments. If they can do the deal they will be paid very well at settlement. If they can’t do the deal they shouldn’t be taking your business at all.
Once you identify a list of potential lenders or hire a broker, get prepared. Do not think that the business loan process is merely a matter or forms and paperwork. While there is more paperwork than you’d ever want to see, it is more of an inquisition.
4. Be an expert salesperson for your project. Obviously, we think that your should use our business plan software (http://www.fundableplans.com) to build a written proposal. Whatever method you use, know your numbers and be able to defend them. Understand your market and be able to speak competently about it. Know your competition. Most importantly, (from step one) know your strengths and weaknesses as a borrower and be able to maximize the strengths and minimize the weaknesses.
If you are successful with steps one through four, you will expect to “hit a home run”. You may, but most likely you won’t.
5. Don’t give up. Where one lender might have too many loans of your type in her portfolio, the next may need exactly your loan to meet his goals (loan officers are paid to lend). This is not to say that you should “beat a dead horse”, but if you have a viable project, a good presentation and good “C’s”, you will be able to get financing.