How To Nail Your Small Business Loan Application

Question: Do you know what a struggling economy needs to help kick it back into shape? Answer: Entrepreneurs and a growing base of small businesses.

The problem is that when the economy is struggling, banks aren’t that keen to take risks on new business enterprises, especially when the risks are being taken by first-time business owners, and even more especially if the owners are quite young. That puts a serious dent in the hopes and dreams of many young start-up wannabes.

It’s quite the catch-22; new businesses are needed to give the economy a boost, but the economy can’t afford to wager on new businesses that might fail. And, let’s face it; a new business is notoriously likely to fail. Depending on who you ask, between 50% and 80% of new businesses fail within the first year.

Consider this: if you worked in a bank’s loan department, would you give a group of kids freshly dropped out of college a loan to start a software development company? Would you feel differently if it was a group of middle-aged managers who want to quit their day jobs to follow their passion and open a restaurant? Would it make a difference if the people across your desk had already successfully started, managed and sold a couple of small businesses?

While preference might be given to people who know what it takes to get a small business off the ground, experience doesn’t guarantee a successful loan application, which is why we look at some top tips to help you secure the loan you need to make your small business dreams a reality.

Tips to secure a small business loan

According to Darrell Zahorsky, one of the most important factors influencing the success of your business loan application is your relationship with your bank. Imagine how obliging you would feel if a very remote acquaintance (a friend of a friend of a friend’s friend) walked into your house and expected tea and card lock

Now imagine your reaction if, instead of dropping in unannounced, this person had phoned you to remind you how you know each other, and had made an effort to establish a rapport before waltzing in and placing demands on your hospitability. It’s not too much of a stretch to apply the principle to applying for a loan.

If you go to a bank with which you’ve had no previous dealings, you’ll probably be treated with a little more circumspection than if you went to the bank where you already have a cheque or savings account, or through which you’ve arranged your life insurance and last will and testament.

You help yourself even more if you’ve established a good business history with the bank; for example, you haven’t spent the past six years barely paying the interest on your overdraft and your cheques don’t bounce a couple of times before payments are processed. A good personal credit history will stand you in good stead when you want to apply for a business loan.

Talk to one of the consultants about what you need to start your business. Even if your bank doesn’t offer those services, it might have business relationships with lenders that do. In this case, the right reference could mean the difference between a successful and an unsuccessful application.

The five Cs – Small Business Loan Application

Zahorsky also references the five Cs, which affect business loan applications; namely:

1)     Character, which has less to do with moral integrity and more to do with business experience, credit history and education.

2)     Capacity, which is the ability to pay back credit, which is based on potential cash flow.

3)     Collateral, which is like a personal guarantee that minimises the lender’s risk, including personal and business assets.

4)     Conditions, which includes the conditions that govern the use of credit according to the agreement.

5)     Capital, which is what the owner is able to personally put up to finance the business. The larger the personal capital amount, the greater the chances of receiving a loan.[easyazon-image align=”right” asin=”B001V9K91Y” locale=”us” height=”400″ src=”” width=”312″]

Plan, plan, plan

No lender in his right mind will lend you money without a proper business plan. The plan does far more than show that the venture isn’t the result of mere whimsy. It demonstrates your commitment to the business, yes, but it should also prove that the risk is either negligible or well worth it.

According to Naurys Marte, your business plan needs to detail how much money you will need, as well as how the money will be spent, and it also needs to include a contingency plan in case the loan falls through or it starts to look as though your business is sinking rather than swimming. Your contingency plan(s) need to be viable. It’s no good paying lip service to a generic plan, like borrowing money from your folks. You need to have thought through all the problems you are likely to face and have a solution that will save your financial buttocks for every one of them.

Don’t give up

There are no set rules for securing small business loans. You could have a fantastic relationship with your banker and still be denied your business loan. You could walk into a brand new bank and walk out an hour later with the ink not yet dry on your loan approval forms. You could be made to jump through fiery hoops and rework your business plan countless times until, eventually, someone recognises your business’s potential and gives you the break you need.

Remember, however, that after you secure your loan, the real hard work begins, especially as you have to justify the financial risk that has been invested in your business enterprise.

Image source: 1

Jemima Winslow writes for a personal financial services specialist whose services include personal loans, debt consolidation and vehicle insurance.


  1. Stacey Walsh says

    For any start-ups, a business plan allows you to gain a better understanding of your industry structure, competitive landscape, and the capital requirements of starting a small business. A study mentioned in “Business Plans For Dummies” by Paul Tiffany states that companies with a business plan have 50% more profits and revenue than non-planning businesses. Writing a business plan just makes good business sense.
  2. Naomi Decker says

    The main requirements of attaining a small business loan are your personal credit history, business plan, experience, education, and feasibility of the business you are starting or expanding.
  3. says

    The easiest way to go about collecting all your experiences, interviews, and research is to create files for each section of the business plan. These files can be: paper-based, computer files or set-up using business planning software. As you start the research and collection phase of planning, fill your files with notes and printouts. Begin the research process with an overview of the industry; uncovering industry and association reports. By having a general understanding of the industry, you will avoid embarrassment in contacting experts with basic questions. Begin the field research once you have a good grasp of the industry fundamentals and need answers to the hard-to-find information. Once the bulk of the data has been collected, the process of analysis begins. Look at building a competitive profile, contingency plan, risk assessment, etc. Start the financials when you have found some average industry ratios for your business. Work closely with your accountant to develop realistic projections. Being overly optimistic will raise eyebrows with your investors or banker. Save the first section for last. When you have thoroughly, completed all sections of the business plan, write the summary. Highlight the key points and include the return on investment or loan payback requirements. Remember, you only have one shot at making a good impression. A well-written business plan that opens doors and wins the money is a plan that has been revised and reviewed. Do not forget this important step. Ask others for feedback. Make certain to edit, proofread, proofread, and proofread.

Leave a Reply

Your email address will not be published. Required fields are marked *