If your business has been around for more than a decade, you might remember how easy it once was to borrow money. "Before the recession, I joked I could fax over a letter and the bank would give me credit," laughs Sean Castrina, the author of 8 Unbreakable Rules for Business Start-Up Success.
That's so 2005. Six years into the recovery from the Great Recession, many small businesses still have trouble borrowing money from a bank. According to online loan provider Biz2Credit.com, big banks approved a mere 22.8 percent of loan applications from small businesses in February. And while there is a wide array of alternative, online lenders to small businesses, they're not always an ideal substitute, with higher interest rates and sometimes restrictive repayment periods. (Personal credit cards, while popular, can carry some very high interest rates, too.) But getting a traditional bank loan is not impossible, even though it might feel that way at times. According to a March Federal Reserve survey, three-quarters of small businesses seeking funds initially turn to a bank, though half don't get all the financing they say they need. If you want to increase your chances, you must go in prepared.
Most important: Think small--as in bank size. Your local bank or credit union is more likely to take the time to get to know your business, while asking for a loan at a big bank can be "like banging your head against a wall," Castrina says. According to Biz2Credit, smaller, regional banks said yes in February to 48.9 percent of loan requests.
Relationships matter. Castrina, for example, stops into his banker's office every time he makes a deposit. "You don't want your conversation to be a once-a-year event, where it's like you're called into the principal's office to beg for credit," he says.
And think about your banker as you would any potential business partner: It helps if you get to know each other before you ask for money. Amy Baxter, the founder and CEO of MMJ Labs, an Atlanta-based manufacturer of pain-relief medical devices, waited seven years to ask JPMorgan Chase to fund her business directly--after the bank watched her tap into and pay back a home equity loan. Baxter's need was somewhat extraordinary: She was scheduled to go on Shark Tank in 2013 and wanted money to boost her inventory. She got a $120,000 line of credit--which allowed her to meet her post-Shark Tank demand, and then to boost her marketing budget. "Every time I would go into the bank and deposit checks from hospitals, the tellers and manager were always interested in how the business was going," Baxter recalls. "Everyone was excited for us."
Whether or not your bank knows you, you won't get money if you don't have a formal business plan and up-to-date paperwork. The bank will likely want to see business-related financial statements for the past three to five years or personal financial records. Be prepared to personally guarantee the loan, even if it's for a business.
Finally, you can always work your way up to a larger credit line. That's what Maria Vizzi, the co-founder of New York City's Indoor Environmental Solutions, did. When she needed $25,000 in 2010 to buy new vans and duct-cleaning equipment, she turned to a megabank where she had been a business customer for three years. It offered her a mere $5,000--but a local branch of Connecticut's Webster Bank came through with the full amount. Today, Vizzi asserts proudly, her credit line "is multiples" of the $25,000 she originally asked about. How did she get an increase when so many others are getting dinged? She used a portion of her credit and then paid it back in a timely fashion. As Vizzi explains, it all comes down to relationships: "If you can show them you honor your financial obligations, they will trust you with a bigger loan."