Many business owners have difficulty obtaining commercial loans, even though most banks receive the vast majority of their profits from commercial loans. Usually, this is because the business owner does not understand the banker's viewpoint. Once you understand how the banker looks at lending, you can tailor your presentation to improve your chances of obtaining a loan.

Loan Criteria
Bankers look at three main criteria. The first is collateral. Even at a high interest rate of, say 10%, the banker will lose 10 times as much principal on a defaulted loan as he could ever hope to make on interest. With 10 to 1 (or greater) odds against the bank, the banker will look for sufficient collateral to reduce the risk in case of default to almost nothing.

As a business owner, you can expect to personally guarantee all business loans, regardless of how long you have been in business. You will also have to offer any equipment you are purchasing, existing equipment and furniture, receivables, inventory, patents, and any other business possessions as collateral. Bankers are reluctant to make unsecured loans to small businesses. Insufficient collateral can ruin a potential loan, even if you have a great credit rating.

The second criteria a banker evaluates is ability to repay the loan. While you are looking at the funds you need to expand or purchase equipment, the banker is concerned about how you will repay any money he lends to you. Therefore you need to show a combination of two or three years of past history (to show sufficient cash flow to service the debt) plus a couple years of projections that reflect the expected increase in revenues and profits from use of the proposed loan proceeds.

In other words, you need to show the banker that you have considered the bank's situation, and have a plan for how you will repay the loan and still pay the bills and yourself on the remaining cash flow. Remember to list the assumptions for your projections, so the banker can evaluate their reasonableness. Most bankers complain that many small business owners come to them asking for funds, but have given no thought to how they will repay the loan. By anticipating this concern, you will gain the banker's respect.

Finally, bankers look at willingness to repay. This can be indicated by credit reports, and also by the banker visiting your business. Get a copy of your credit report BEFORE you apply for a loan. That way you can clear up any wrong information before it becomes a problem with the banker, or at least you can prepare written explanations for anticipated questions. Also, if you include a copy of the credit report with the loan package, each banker will not initially see repeated credit inquiries, and therefore will not be concerned about you "shopping the loan."