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When you apply for a business loan at a large bank, often times small businesses get declined. Thousands of requests for business loans are declined every weekday in the United States. The odds of a startup business getting a loan from a large bank is not very favorable. This because large banks are mostly focused on sourcing and scaling loans over millions of dollars, cross-selling products to their customers, and driving down costs through standardized operating procedures and technology. The good news though is that there are community lenders available to help small businesses.
Meet the Community Lenders
One type of community lenders is the Community Development Financial Institutions (CDFIs). CDFIs can be nonprofit lenders, credit unions, small banks, microfinance lenders, venture capital firms, or community development corporations focused on low-to moderate income housing.
They are usually nonprofit organizations that omit to the mission of making capital available for the communities they serve. When a bank says no to a small business, a community lender will say yes because they focus on the community, not on the return on investment to shareholders.
Do some research to find a community lender near you. There are thousands over the country that can help you get the capital you need.
Do Your Research
Before you apply for a business loan from a community-based lender, do your homework. Make sure you start at least 60 to 90 days before you need the funds because the process takes some time. When you search for community lenders in your area and find one that catches your interest, schedule a meeting. This gives you the opportunity to ask questions about the lender and get familiar with the loan process.
Be sure to ask them about the loan products they offer including lines of credit, term loans, or commercial real estate financing, the interest rate, and their terms. Ask about any loan fees and if they have prepayment penalties for paying the loan off ahead of the schedule. You might find that the interest rates are higher than if you went to a bank but the outweigh the negatives when you add up all the other benefits of working with a community lender.
Make sure that your finances are in order. You will need to be prepared with three years of personal and business tax returns, a business plan with recent profit and loss statements (also called income statement), balance sheet, cash flow statement, and a description of how the funds will be used. Update your resume and highlight the experience you have that will make your business a success. Your loan officer at the community lender will help you complete the application process.
Before you apply for a loan, review your credit report by requesting a free copy from the three major credit bureaus, Equifax, Experian, and TransUnion. Also, know what your credit score is. A score that is 680 or higher is in good standing.
Every credit bureau is different so make sure that you report any inaccurate or derogatory information that you find. This is another great reason to give yourself more time to get through the loan application process.
Be prepared to personally guarantee the loan. This is necessary should you default on the loan. The personal guarantee gives the lender the ability to go after your personal assets to get the debt paid in full. In addition to the personal guarantee, the lender will want collateral to secure the loan. The most common type of collateral is a personal residence when there is equity in it. Other types of collateral include equipment, stock portfolio and more. Community lenders tend to be more flexible than most banks regarding collateral and are more willing to work with you.
Respect the process
You loan office reviews your application and determines your credit worthiness during the underwriting process. During this phase, the lender pulls the copy of your credit report from one of the three major business bureaus. Lenders do not want surprises to play detective. If you have any negative information that they should be aware of, let them know early on because you do not want to lose the trust of the lender.
Historical financial performance and cash flow must demonstrate that the business can service the debt on the proposed loan. Cash flow from the business is the primary source of capital to repay a loan. Community lenders put more weight on projections for a startup. If you cannot show that your business can pay the loan from the cash flow, you will be declined.
Respect the process and do not get frustrated by the paperwork or time it will take form the initial introduction to the funding of the loan. Focus more on the end goal.
Learn the 5 C’s of Credit
Lenders evaluate you on the five C’s of credit which include character, capacity, capital, collateral, and conditions.
Character: lenders want to see that you pay your bills on time and it shows that they can trust you with their money.
Capacity: the ability to repay the loan based on the cash flow of the business.
Capital: your contribution to the project. Lenders do not want to finance 100 percent of a project.
Collateral: the assets securing a loan that give the lender confidence you are worth funding.
Conditions: how the funds will be used as well as economic and industry factors that could impact the loan.
The Bottom Line
Explore community-based lenders instead of running from bank to bank hoping to get a small business loan. CFDIs and other nonprofit lenders are in every state, and they are focused on serving their communities in a way that will expand economic activity. They know the community and their decisions are made locally.
