Most small businesses need some type of financing to start their operations or expand current operations. The most popular form of financing is a loan obtained from a bank or credit union. In order to obtain bank loans, businesses face strict requirements by the lending institution.
- The first requirement is a good credit history with vendors or other lenders. The amount of credit and repayment history is are important factors that banks review when making loans to small businesses.
- Banks will make loans to small businesses where the principal owner or manager has extended experience in their business operations. This ensures that some level of success will be made by the business, enabling it to repay the loan.
- Most banks will require a written business plan from small businesses to see what type of market analysis was completed before they started their operations. Banks use this information to gauge the strength of the business's future financial goals in the market.
- High levels of owner equity indicate to banks that owners are willing to sacrifice their personal wealth for their business. Banks may require a certain percentage of owner equity in the business before they make a loan to the business.
- The Small Business Administration offers a guarantee to banks that small business loans will be repaid in case of default. This allows the bank to recover losses without a lengthy legal battle with a small business.
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