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How do you hear "yes?" That's the question that gnaws at small business owners in search of a bank loan. If you ask entrepreneurs, it's as though, in their minds, the entire process is riddled with voodoo, uncertainty and a whole lot of luck. But that's not at all how loan officers see the process. Here are pointers from David Scarpinato, a commercial loan officer in Wells Fargo's San Leandro, CA, office.
1. Company profitability. Is profitability a must for applicants? Not necessarily. Sometimes loans get made to high-potential businesses if there is a high probability that the infusion of loan money will bump the business into the black. The more usual rule, however, is for loans to go to profitable companies.
2. A track record. "Startups sometimes win loans but odds are higher when a business comes in with a three-year history," Scarpinato says. Be able to point to steady growth. That builds confidence in any loan officer.
Service and Sales Company Loan Tips
• Go in to set up funding when your books look strong, not when they don't. Loan applications by sales and service firms will look better with little debt.
• Service, sales and construction companies ought to aim for debt to equity ratios of 4:1 ($4 in debt for every $1 in equity) or even 3:1.
• Service companies should show they have collateral that will cover the loan amount.
• The better your story, the more likely you will get approved. Service and sales companies need to polish their explanations about why they need a loan — "What will you do with it?" "How will it make your business better?"
3. Quality financial statements. This means a loan officer wants to be handed well-organized, readable financials. Do they have to be prepared by a financial professional? Not necessarily. Smaller companies can definitely use inexpensive, off-the-shelf software. The bigger issue is: Are the financials credible and understandable? If they aren't, the loan applicant probably isn't going to get very far.
4. A specific need. No loan officer likes it when an applicant shrugs when asked what the borrowed money will be used for. Have a plan. Be able to show how the loan will create more profits.
5. Good personal credit. "Certainly, 'good' is an adjective that covers a range of possibilities—but a bottom line for any small business loan application is that when the credit histories of the owners are strong, the application probably will look better to reviewers," Scarpinato says.
"If you're thinking about applying for a loan, ask your loan officer," Scarpinato says. "We'll talk it over with you and help get you ready to apply successfully." In other words, don't try this alone. Particularly when seeking a first business loan, ring up your banker and ask for insights and tips. Loan officers want to share the information that will help you succeed.
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