Key Factors for obtaining Small Business Loans

Banks use the following credit criteria to lend to small businesses:

• Good Credit Score. This is a very important factor in the consideration for a loan, but not the only one. If your score is not good right now, work on improving it.
• Collateral (security for loan). In some cases (low-doc loans), a good credit score and down payment are enough to secure a loan. Depending on the amount of the loan, you may also have to offer collateral. You can use your house, retirement plan, or any other major possession as collateral if the bank requires security in the event you cannot pay back the loan.
• The relevant experience of the business owner is also an important factor for the loan package. Banks feel more confident in giving out a loan to business owners who have relevant experience in the business that they are starting, such as a dentist opening a private practice.
• Owner's Investment. If you are forming a new business, be prepared to invest a certain portion of the start-up costs personally. Lenders rarely finance 100% of the business. They will expect you to raise 20 to 40% of the investment yourself. Note some banks will even expect a 100% cash collateral (depending on the risk), by depositing cash on a CD, and using the CD as a guarantee. The higher your personal investment in the business, the better the loan application looks to the lender.
• Good Business Concept or Plan. A bad credit score can be mitigated with a good business concept. For example, Daniel Ludwig (a shipping tycoon) funded his vast shipyard empire by using bank loans, even when he had bad credit. When he needed to build a new ship, he would charter the ship's services to a customer at a discount before the ship was built. He would then go to the bank and borrow money to build the ship. The bank would give Ludwig a deferred payment period on the loan while the ship was being built, and once it was operational, Ludwig would assign the charter payments to the bank until the loan was paid off.
• Character Lenders will look for evidence of your trustworthiness.
• Capacity to Manage and Pay. The business should be able to generate enough cash to pay back the loan installments.
• Collateral and Guarantees. The lender will look at how the loan can be secured. He or she will give importance to the individual's personal financial statement and see if the loan can be secured against personal and business assets.

Hopefully, you are already at the stage where you are looking for funds to start or expand your business in the city. In this article, we will explain some of the different types of financing available to you. Loans are a time-tested ways of raising capital raising capital for your business. We would love to tell you that it is as easy as going to the bank and asking for money, but as you probably know by now it is quite the opposite. As the credit becomes more difficult to obtain, banks are using traditional lending methods to provide credit to small businesses.