Securing a loan with a bank is nearly impossible these days for most small businesses. I manage a small microloan fund that is meant to serve entrepreneurs who have been turned down by traditional banks, yet only 10% of entrepreneurs who apply for one of our microloans are approved. I have observed 3 reasons that most of our loan applicants are denied by our loan committee.
1. Poor Executive Summary - The first thing that the loan committee does is browse through the executive summary of the business. This is the first impression for the business. Sometimes the committee has all but denied the loan by the time they finish the executive summary. Your executive summary must build credibility, demonstrate how your business solves a problem, and clearly explain your business model. If your executive summary does not do this, the committee may not even look at the rest of the loan application.
2. No Backup Plan - Bankers always look at the worst case scenario when evaluating a loan application. In order to make a banker feel comfortable you must demonstrate that you can pay back the loan even if the business fails. There are a number of ways to do this. For example, your spouse might have a full-time job that could help make the loan payments. You might have collateral like a house or a car that you can pledge to the bank. Or you might have a rich uncle who is willing to co-sign on the loan with you, which means your rich uncle would be on the hook to pay back the loan if the business flops. One way or the other, you must put together a strong back up plan.
3. Lack of Traction - Bankers and investors are looking to put money into businesses that have momentum on their side. If you have not made your first sale, then you can’t expect to secure a loan. You need to demonstrate traction, and the best way to show traction is through an increase in customers, sales, or profits. Bankers are conservative by nature, which means they want to look at the past to predict the future. If your past results are poor or even non-existent, most bankers are going to run the other way.
Although it is difficult to secure a business loan today, there is hope. Banks are lending to strong businesses. If you can present your company in a positive light through a powerful executive summary, outline a safety net or backup plan for the lender, and show that you have some momentum in your business, you can secure a loan.