Finance & Accounting

Make Your Business Loan-worthy

Make Your Business Loan-worthy

Borrowed money is often the key to building and growing a successful small business. For independent business owners, however, courting lenders isn't always easy. Here's how to make a strong case and win over even the choosiest banks.

By Matt Alderton


Starting a business isn't easy, nor is it cheap. That's because in addition to hard work and lots of preparation, behind every "Open" sign is an abundance of equipment, inventory, marketing and manpower — all of which cost money.

"When starting some businesses, you need money to fund start-up expenses and initial operating expenses," says small business counselor Hal Shelton, who heads up the Washington, D.C., chapter of SCORE, which provides free small business counseling and low-cost business workshops to entrepreneurs and small business owners nationwide.

Of course, if you don't have money, you'll need to find it. "The first place you should go is your own savings," says Scott Shane, professor of entrepreneurial studies at Case Western Reserve University and author of Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors and Policy Makers Live By. "If you don't have savings, though, you'll need to borrow."

Borrowing is especially nerve-racking for the self-employed who lack partners and investors with which to share financial risk. For them, loans are equal parts obstacle and opportunity; overcoming the former in order to seize the latter is a matter of preparation, planning and persuasion.

Understanding Risk
More than half of all small business startups fail within their first five years, according to the U.S. Small Business Administration. The number is even higher among sole proprietorships, according to Shane, who suggests that single-owner businesses lack many of the characteristics that make small businesses successful, such as experienced management teams and well-funded stakeholders.

"Most small businesses fail, and most people starting them don't actually make much money," Shane says. "When a lender looks at you, they're considering averages. Sole proprietorships tend to perform worse than corporations or partnerships."

For that reason, the self-employed must sell themselves to lenders as exceptions to the market rule.

Borrower Options
Small business owners have several choices when they need to borrow money. They include:

  • Bank loans: A conventional bank loan is your best — and cheapest — bet.
  • SBA loans: Although they're designed for small businesses, loans that carry an SBA guarantee tend to be more expensive than typical bank loans.

Another option is a loan from one of the nation's 1,000 community loan funds, according to Daniel Betancourt, president and CEO of Community First Fund in Lancaster, Pa. "Because traditional banks are nearly always looking for two years of financial history, it may be difficult for a startup business to borrow from them," he says. "That's when economic development banks community loan funds like ours can really help."

Even community funds won't lend to high-risk borrowers, however. If you don't have much savings to finance your business, one of the best options remaining would be to get a home equity loan, Shane says.

"It's hard to borrow money for your business if you're trying to borrow it on the basis of the financial performance of the business," he says. "So what you can do is borrow personally."

Sales Strategies for Borrowers
Given the challenges that small business owners face in the marketplace, they have to be especially competitive in applying and shopping for loans. In order to persuade lenders that your business is loan-worthy, consider the following tips:

  • Sell yourself. Don't just convince the bank that your business is good: convince it that you, the owner, are good. "What matters most is the business owner's presentation of his or her idea," Betancourt says. "He or she should stress strengths and explain weaknesses."
  • Emphasize experience. "The bank does not want to pay to train you," Shelton says. "You need to have experience. If you don't have it, go work for someone else in your chosen field before you start your business."
  • Offer collateral. Because actions speak louder than words, borrowers who are willing to maximize personal risk are most likely to persuade lenders. "The bank's going to give you 80 percent, 85 percent, 90 percent [of what you need]," Shelton says. "You're going to have to come up with the rest. The bank wants to ensure you are invested in the business."
  • Build relationships. Lenders are more likely to give money to borrowers whom they know, Shane says.
  • Create a killer business plan. No matter your size, Shelton insists, you're most likely to be approved for business loans if you present lenders with a strong business plan that includes solid financial projections, market analyses and marketing strategies.

"If you have a good business plan, you know what you're doing, you have enthusiasm for it, you have experience and you have some equity to contribute, the bank loves you — no matter what size you are," Shelton says. "And even if you have a business that doesn't need start-up funding, you still have a business plan to provide a road map for your business efforts and be a gauge to assess progress."