The Sure-Fire Way to Get a Loan for Your Small Business

by ProjectionHub on January 23, 2013

At the end of the day it all comes down to one question.  Any potential small business lender is going to ask one ultimate question that will decide the fate of your loan application.  That question is: “will we get our money back?”  There are 3 ways that a small business lender can recoup funds from a borrower, and if you can prove that you can repay the loan from at least 1 of these 3 sources, you will likely get approved for a loan.

1.  Cash Flow – The best way to secure a loan is to convince the bank that your business will produce enough positive cash flow to repay the loan.  In order to do this you are going to need to create a set of pro forma financial statements with reasonable sales and expense assumptions.  You will also need to show that you can repay the loan based on past financial statements.  If you lost $300,000 last year, you are probably going to have a hard time convincing the loan committee to approve a loan.

2.  Collateral – If the business fails, and can’t pay back the loan from cash flow, then the lender is going to come after your assets.  If you have assets that can be legitimately valued at more than your loan amount, then you are much more likely to be approved for a loan.  Different types of collateral have different levels of value in the eyes of a banker.  For example, your inventory may only be worth half of what you value it at to the bank because the bank may not know how or where to sell the inventory.  A vehicle is stronger collateral because it can be easily sold, but may not hold its value over time.  Finally, a building tends to be strongest form of collateral because it has a longer useful life, and should hold its value longer than other forms of collateral.

3.  Co-Signer – Sometimes your past financials, future financial projections, and the value of your collateral won’t be enough to make a banker feel comfortable with your loan request, so you need to bring a strong co-signer to the table.  Lenders want to see a co-signer with a strong credit score because that means they have something to lose if they don’t pay back the loan.  A co-signer with assets and a strong credit score can really solidify your loan application.

Bankers really aren’t that hard to figure out.  At the end of the day they just want their money to come back with a little bit of interest.  Bankers really don’t want to have to come after your collateral or your co-signer, so your cash flow projections are going to be vital to your success.  You can check out our extensive guide on how to create a cash flow projection here.

Leave a Comment

Previous post:

Next post: