Not every bank is enthusiastic about small business loans, and they are often turned down for a number of reasons that have as much to do with the business’s preparation as the business itself. However, banks often have small business customers through bank accounts and personal accounts long before they come for a loan.
If a bank builds credibility with its customers, it can help the small business owner be more successful when applying for a loan. Banks should help the small business owner by sharing some important strategies long before he/she applies:
- Increase Consistent Cash Flow- It may seem obvious to you, but it is not always obvious to a small business that cash flow is an incredibly important consideration when a bank considers him/her for a loan. It is likely the owner may be coming to you because there is a cash flow crisis. However, advising the small business owner to cut costs before coming for a loan, and positioning the business as seeking to benefit from expansion rather than a bail out, will make the story more appealing to the bank.
- Build your Business Before Coming for a Loan: Many people come to a bank to fund their new idea from the start, which of course are some of the riskiest loans to provide. While there are loans for start ups, if a business owner can launch and run his or her business on its own for a few years, the likelihood of approval will skyrocket, and the interest rate will be more reasonable.
- Have a Strong Business Plan: Small business owners often think it comes down to credit scores and personal capital. They are right that that is where things start, but they are incorrect that this is where a small business loan application should finish. A banker should advise their small business customers to approach them the way they might approach a wealthy investor or a even a private equity firm. While that might seem intuitive to you, it is not intuitive to them. Your small business customers, particularly if you are a regional bank, know you first and foremost as the entity where they hold their personal bank accounts and perhaps their home loan.
They need to be reminded that in many ways a bank works in the same way as any other firm that would invest. If you prepare them to be ready with a plan in advance, their success rate will rise and you will not waist valuable time on loan applications that will not be accepted.