Sunday, October 12, 2003

Prepare before you seek a loan

Small business

By Rhonda Abrams
Gannett News Service

Be prepared. That's not just the Boy Scout motto - it's good advice before you approach a bank for a business loan.

According to a report released in September by the U.S. Small Business Administration, credit cards are the primary way entrepreneurs finance their businesses. But as businesses get bigger, a majority - 55 percent - get financing from a bank, credit union, or other lending source.

If you've ever gone to a bank for a loan, you know it's not easy. Recently, for a potential loan for my own business, I interviewed lending officers from three major banks - Wells Fargo, Washington Mutual and Union Bank - to see what they really look for.

All three asked virtually the same questions, so it pays to be prepared to answer these questions:

• Question: How long have you been in business?

Before bank officers spend much time with you, they want to make certain yours is the kind of business they'll lend to. Most banks lend only to companies that have been in business at least two years. If yours is newer, you can seek an SBA loan or personal line-of-credit.

• Question: What kind of loan are you looking for?

Banks offer three types:

1. Term loan: For a set amount of money, time and interest rate. You pay back a portion of the loan and interest monthly over the life of the loan. Ask for a term loan when you have expenses associated with growth, such as buying real estate, equipment or expanding operations.

2. Line-of-credit: Like a credit card without the card. The bank gives you a certain credit limit, and you can borrow any amount up to that limit. You can pay back the funds on your own schedule (with minimum monthly payments), but you'll likely have to pay off the entire amount at least once a year. Interest rates can fluctuate. 3. SBA loan: Banks that do a lot of SBA lending often have separate staff handling SBA loans rather than branch personnel. SBA loans are best for starting a business (banks don't usually lend to start-ups), purchasing the business' real estate or for strong businesses that have problems qualifying for regular bank loans.

• Question: How much money do you want?

Banks will often limit a line-of-credit to the amount of your accounts receivable. Loans for more than $100,000 are probably going to be sent to a central office and get more scrutiny.

• Question: Are you profitable?

They just want to see that you're not losing money, that you can pay your bills, and that you're probably going to stay in business. They will ask you for your tax returns for the past two or three years.

• Question: Do you have good credit?

The bank is going to check with Dun & Bradstreet and your company's creditors to see if you pay your bills. They will also typically run a personal credit check on you.

You can check your credit at and

• Question: Are you willing to personally guarantee the loan?

Until your business gets fairly large, expect to sign a personal guarantee for your company's loans.

Rhonda Abrams is the author of "The Successful Business Plan: Secrets & Strategies" and the president of The Planning Shop, publisher of books and tools for business planning. Register for her free business tips newsletter at

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