One of the solutions for boosting your business capital is to seek a commercial bank loan. Apart from the government loans (mostly given through the SBA), commercial bank loans are the second best option for financing small businesses. However, to qualify, you have to prepare thoroughly since bank loans will scrutinize you and your business closely before advancing you the loan.
The basic criteria for giving small business loans are the same with all lenders. For example, all lenders will want to see a business plan and to know how you plan to invest their money. It is important that you prepare thoroughly because every commercial bank that you approach will want to interview you. Even though some lenders will be very strict, you will get the loan eventually. Just keep looking.
Important facts about commercial bank loans for small businesses
1. Commercial bank loans for small businesses are amortized. This means that the principal amount and the interest is lumped together and then divided into equal payments per month over a given period of time, by the end of which the entire loan will have been repaid in full. The interest rate is usually fixed, but nowadays, some banks do offer loans with reducing balance interest rates. If you find such, it could mean paying a lower interest rate with time.
2. You can borrow short term loans to be paid back in one year or less. There is usually no problem with such loans and you will find that lenders assent to such faster than they would do for long-term loans. The short term kind of loan for small businesses is given for immediate expenses like payroll, stocking and so on. It attracts a higher interest rate.
3. There are different types of commercial bank loans for small businesses. The most common is the intermediate bank loan that is offered to small businesses when they are buying equipment like computers, printers, photocopiers and other operating equipment. To ensure that the bank recovers its money, they put in place restrictive terms. For example, the management cannot give things like bonuses before they pay the bank loan.
Mostly, intermediate loans for buying equipment are paid in less than three years. It also comes with variable interest rates.
4. Then there is the long-term loan for small businesses from commercial banks. In many instances, this kind of loan is only given to the small businesses that are very well established, after having been in the market for some time. Long term loans are secured by property, equipment and other assets that the business can forward as collateral.
Such loans are advanced when the small business owner wants to buy assets like equipment and real estate. The repayment period can be as long as anywhere between one and twenty years.
A few things you must fulfill to have the business loan approved
For a small business owner to have his/her loan approved by the bank, he/she has to fulfill a few things. One of them is to show consistent cash flow. Don’t be surprised if the lender wants to see the books of accounts.
You will need collateral for long-term loans. The value of the collateral is matched dollar for dollar against that of the loan, plus interest. This way, the lender is assured that they will get their money back even if the borrower defaults.
If yours is a start-up business and you want a loan, the commercial bank is going to consider how much money you are putting up yourself. If you are only aiming to use the bank loan to get started, they may not lend you the money. The money you are willing to put up for your business is called commitment. So before you can go to borrow a loan, make sure that you have saved some money, so that you do not have to borrow too much from the bank.
What is your financial status? Are you creditworthy? Do you have good credit score? You are the owner of the business and therefore, if your creditworthiness is questionable, the commercial bank may not give you a loan and if they do, it will be on very strict terms.