Need a small business loan? Get to know your lender

Betsy Markey
Betsy Markey

You’ve decided on XYZ Bank to lend your business some badly needed capital. So it’s time to visit the banker, right? Wrong.

Once you sit down with a banker, you’ll need to answer a variety of questions about your financial needs and business goals. If you do a little homework beforehand, answering those questions thoroughly could ensure a smoother, and possibly quicker, loan application process.

Here are a few of the questions most commercial lenders will want answered before your loan application can proceed: What is your company’s experience in its particular industry and market? Do you have a well-designed business plan that includes a market definition, vision, company goals and financial projections? What resources are available to support reasonable equity investment. What’s your willingness to pledge personal assets to support collateral?

Bankers also will need to review federal tax returns, monthly or quarterly financial reports and year-end balance sheets and income statements for the last three years — or since the business started, if it’s less than three years old.

Why is it necessary to provide all this paperwork to receive a business loan? The answer is simple. Most financial institutions are relationship lenders. The business relationship you create with a commercial lender is based on experience, financial strength and integrity. Your lender must be assured the cash flow generated by your business will be sufficient to make loan payments. The more complete your loan documents, the better your chances of getting a loan.

Once your planning is complete and you’ve gathered the supporting documents you need, then it’s time to discuss your financial needs with a commercial loan officer. Many times the first step is completing a loan application. Other banks could use business financial statements as an application. This application provides the banker with critical information, including the history of the business, names of owners, legal structure, pledged collateral and purpose of the loan.

Once the application is complete, your lender will want to discuss a variety of topics, including  short- and long-term business goals. Why do you want credit instead of internal financing? Will you purchase real estate or equipment? Pay off vendors? Do you have expansion plans? Will the loan require a U.S. Small Business Administration guarantee?

The answers to these questions will dictate the type of loan needed and terms under which the loan will operate.

Next, your banker will probably discuss details of the loan and the performance the bank expects of your company to satisfy financing requirements. Many loans require a personal guarantee, which means you must provide personal financial information. A personal guarantee is an unsecured written promise from a business owner or executive guaranteeing payment on a commercial loan in the event the business doesn’t pay. Since it’s unsecured, a personal guarantee isn’t tied to a specific asset. In the event of non-payment, a lender can go after the guarantor’s personal assets.

Once all of the necessary paperwork is completed, and the terms, amount and expectations of the loan are agreed upon, the loan will be submitted for approval. To improve the odds of having your loan request approved, be aware of these common reasons why business loans are denied: problems with past business or personal credit, lack of equity in the business, lack of planning, lack of collateral, a sloppy application with obvious errors, unrealistic assumptions, tax liens or judgments against the company and a recent bankruptcy.

Some industries naturally have a higher-than-average probability of failure, but each bank’s experience by industry could vary. If you’re concerned about your industry’s performance and fear it could affect your application, talk to your lender. Ask how much experience the lender has in your industry and whether or not it’s been positive.

Working together as a team with a commercial lender will place the business owner in a better position to make sound business decisions and build a better foundation from which to reach financial goals. For more information on securing a small business loan, visit the U.S. Small Business Administration website at