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Funding 101: Prep

 

A traditional bank loan (not the SBA-backed kind) looks a lot like a traditional consumer loan for a car or a home. Unlike SBA Loans which tend to be smaller and slightly subsidized, a traditional bank loan is going to have very real underwriting requirements.

How do I Qualify?

Most entrepreneurs only pursue this type of funding if they have some sort of existing equity to use as a down payment toward the larger loan. Unfortunately for most businesses, some available down payment cash is the one thing they rarely have.

Still, if your credit is decent (think about 680 by FICO standards) and you have at least 20% of the total loan amount to put down as a deposit, a traditional bank loan is absolutely an option.

What are Potentially Negative Factors the Bank will look for?

Similar to your application for a car loan or a home mortgage, the bank will certainly be concerned if your down payment is too low (or not at all), if your credit score is below 640, and if you have any kind of negative infractions on your credit report such as tax liens or judgments.

Beyond the credit factors, there are also the factors of your ability to repay the loan. If your forecasted monthly budget post-funding does not demonstrate an ability to repay the monthly costs of the loan, that is going to be a real problem.

Even if all of these factors are in your favor, you still may find a bank that does not consider your type of business to be a good risk. There is no absolute right or wrong business type, but if the bank has seen significant increases in risk in a particular industry, they may decline to participate. Many of these issues can be quickly addressed upon your initial discussion with the bank.

What Documents do I need?

There are two types of documents you’ll need – those that explain the business operations and those that confirm that you’re a real, ongoing business.

The “business operations” documents typically include a Business Plan (or at least a well-communicated overview of the company’s operations), comprehensive financial documents including an Income Statement, Balance Sheet, and Cash Flow Statement.

The next group of documents that will be required will involve your Articles of Organization, Employer Identification Number (EIN), and any relevant State business licenses that you may have.

What type of Interest Rate will I pay?

Interest rates float like any other loan, but you can expect to pay no less than 4% and up to 12% depending on the market conditions, your credit profile, and the size of your down payment.

Where do I Apply?

The easiest place to start is with the bank you are currently doing your business (and likely personal) banking with. This bank may not necessarily offer the best rates, but there is a bit of a benefit toward working with a bank that you already have some relationship with. There are also a number of banks that will now accept applications online as well.

Summary

A traditional bank loan looks a lot like a traditional consumer loan for a car or a home. While it is not the best or most realistic option for most entrepreneurs, it can be a great source of capital. The bank will be looking for a number of factors in your application including a sizable down payment of at least 20%, a good credit score ( 680 +), and comprehensive financial documents that show you are a real company.End