Are you worried about seeking your next bank loan for your business? Avoiding these 4 mistakes will decrease your stress and worry.
If you’re seeking a bank loan for your business, chances are you’re worried about whether or not the bank will approve the loan. Believe us – you’re not alone. We work with business owners every day in commercial real estate and, since we’re business owners ourselves, we understand running a business isn’t easy. We know the thoughts that keep you awake at night: “If I don’t get this loan, then how can I grow my business?” or “How can I reach my dream of owning my own business without cash?” It can be very stressful and overwhelming.
You want to give yourself the best possible outcome when it comes to applying for a bank loan for your business. Whether you need a loan to start a new business or raise more capital for your established business, getting approval isn’t easy. Understanding what motivates banks will help increase your chances.
Stop worrying about your bank loan by learning from these 4 common mistakes.
Underestimating the importance of your personal credit when applying for a business loan will have negative consequences. Bankers will evaluate your personal credit to assess your performance history with financial responsibilities. When you pay bills 30 or more days late, you’re considered a “slow pay,” and banks take this label very seriously.
Let’s face it – if you can’t pay your bills on time, then what’s the likelihood of your paying back a loan? Also, don’t forget that your spouse’s credit matters too. Bottom line – if you are a business owner who can’t demonstrate diligence in managing personal finances, then most likely, the bank will assume you won’t manage business finances well, either.
It sounds counterintuitive, right? Well, if you apply for credit when you need it, you’re often in a position to be denied. Meaning, if you wait to get your credit line when your business situation is unfavorable, you won’t have a good story to tell. This increases your risk of not getting the loan when you need it the most. When business is going well, you have a really good story to tell. This is the best time to obtain a loan.
Another reason to apply when you’re doing well is to establish a relationship and good credit with the bank. If you take out a loan and pay it back on time, this will likely increase your chances of getting money when you need it most. So, apply for loans when you DON’T need help because you’ll have a relationship and a line of credit available for tough times.
You need to look at your overall long-term business strategy and goals instead of just one goal in the short-term. For example, sometimes business owners can reduce taxes by showing losses. While you may save cash in the short-term by reducing taxes, reporting losses is not good for obtaining a bank loan.
Banks don’t care if you saved cash by showing a loss; to them, it’s simply a loss and they see you as not bankable. Another example is venture capital. With venture capital funding, you give equity to your venture capitalist partner. So, unlike the bank which focuses on debt, the venture capital funding focuses on equity. Industries like IT businesses often use venture capital, which doesn’t align with the bank’s incentive. So, if you’re an IT business wanting a bank loan, you may have more long-term planning to do so you don’t apply for the wrong financing.
The bank is looking at your balance sheet for assets within the company to ensure you have collateral. However, this can be complicated.
For example, a real estate company’s main asset is income-producing brokers. Banks will want to know what kind of agreement you have with the brokers and how you’ll replace their income if they leave.
Banks are also interested in the scalability and sustainability of your business. If one part of your business is removed or if the market changes, will the bank believe you are still able to pay back the loan? One way of guaranteeing a loan is with real estate collateral.
Making mistakes is a part of business; but, we’ve found most bank loan mistakes can be avoided by proper planning and understanding what motivates a bank. Simply put, banks are really only interested in your ability to pay back the loan. They want a demonstrated track record as proof. By applying these 4 tips you will increase your chances of approval and decrease stress while allowing you to focus on your business.
Do you need advice on increasing your commercial real estate assets to better position yourself for obtaining a business loan? Contact Verity to speak with an experienced real estate advisor.