5 tips for small businesses owners to find a bank loan

1. Be wary of online lenders

The idea of an upstart online lender may appeal, but credit applicants have reported the most success and satisfaction with their borrowing experience at banks, particularly small banks. Nonbank online lenders had the lowest borrower satisfaction rates despite relatively high approval rates, mostly because of concerns with high interest rates and unfavorable repayment terms.

2. It's much easier than it used to be

Thanks to competition and industry changes, you may find it less cumbersome to apply and a faster response to your application than you would have a few years ago. While some financial institutions have developed online business-loan applications or partnered with third-party providers, others like Alabama Credit Union and Nutmeg Federal Credit Union in Connecticut have added staffing or implemented behind-the-scenes technology.

3. Have your records ready

You need financial records and probably a down payment. Business owners seeking loans are often surprised that a cash down payment of around 20 percent is typically needed. If you are used to putting down 3 percent to purchase a house or nothing to purchase a car, you may not realize that lenders require some “skin in the game” for a business loan. Similarly, lenders will want to see up to three years of financial records and any projections you have (personal tax returns, business tax returns, income statement and balance sheets, purchase orders, K-1 statements). Don’t forget to clarify any personal debt that is actually for business purposes. Otherwise, some banks might double-count a credit card used for the business if it shows up on a personal credit check and also is included in the business’s tax return.

4. Know the real bottom line

This can result in a mismatch between what the business owner assumes the business is worth or making vs. what the business is truly generating in income. A business bringing in $1 million in revenue but paying out $990,000 in costs and expenses, isn’t making that much money in the end.

5. Don't be too clever for your own good

Don’t try to “hide” your business’ success at tax time. Peter Brown, director of strategy and operations for the financial institutions division at Sageworks, said taxpayers often encourage tax preparers to include as many deductions as possible to reduce taxable income, but that can come back to haunt business owners seeking a bank loan if the lender sees insufficient income on returns to repay the loan. “Business owners need to be talking with their accountant about the implications of the way they file their taxes,” Brown said. “For example, if they’re going to be using deductions, see if there are some that could be tied to depreciation. Banks’ loan decisions are typically based on EBITDA [earnings before interest, taxes, depreciation and amortization], so if you can write off something as a depreciable asset for tax purposes, that will help reduce taxable income but will also keep your cash flow at a good level.”