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A Google search about small business loans from banks will yield countless articles about what you need to qualify. Odds are, this is mostly information you already know. You know you need strong cash flow, a flawless personal credit score, collateral, a business plan, etc. It’s safe to say that most previous bank loan applicants were aware of these requirements as well. Still, the bank loan remains a puzzle that so many hard-working business owners can’t seem to crack. Much of this mystery likely stems from certain details about bank loan applications that aren’t as widely-known.

Here are 5 things you probably didn’t know about bank loans, specifically in regards to the application process:

1. The business plan is huge!

On the surface, the idea of composing a business plan doesn’t sound too intimidating. All you have to do is explain what your business does, how you plan on using the borrowed funds, and what your investment will do for your revenue over the coming years, right? If only it were so simple. Answering these questions is just one small part of what is actually a 12-15 page proposal that is so extensive it requires a table of contents. Composing a business plan could very well turn out to be the most tedious aspect of your small business loan application.

In addition to answering the aforementioned three questions, your business plan must include an executive summary, market analysis, outline of organizational and management structure, marketing strategy, and more. The third item refers to the borrower’s track record as a manager, since banks tend to favor applicants with significant experience. You must also explain the current and projected state of your industry, target demographic, and biggest competitors. As you can see, you have to do a lot more than describe why your cash flow is in good shape.

2. The old saying about capitalization is basically true

There’s an old saying about banks: They only lend to people who don’t really need the money. Many borrowers would say this is 100% correct. The saying stems from one of the biggest deal breakers for loan applicants, which is capitalization. Banks primarily approve small business loans for applicants with plenty of money to spare. “Plenty of money,” however, doesn’t just mean enough money to cover a few loan payments on your own in the event that the investment falls through.

What the bank really wants is a borrower whose company is doing so well that it could essentially carry out the desired investment without additional funding. So, if this is the case, why would such a borrower pursue a small business loan in the first place? The most logical answer is that they’d prefer to not spend their own money on something expensive when they have the option to spend someone else’s. In other words, banks like to work borrowers who would do the same thing they would in this situation.

3. Loan covenants increase risk even further

When you sign a contract for a bank loan, the contract will most likely include what are known as “loan covenants.” These are conditions the borrower must obey, though they usually only take effect if you fall behind on loan payments. When that happens, loan covenants could force you to maintain a minimum amount of available capital until the debt is paid off in full. You might be prohibited from making purchases of a certain amount or signing leases without approval from the bank.

The threat of loan covenants is likely a big reason why many businesses that can qualify for bank loans are too afraid to pursue them. Having to pay back more money would be the least of their problems. Loan covenants are also why anyone thinking of signing a bank loan is strictly urged to have an accountant, lawyer, or financial advisor review the document before making any commitments.

4. SBA Loans are still approved under the bank’s rules

Banks are among the few sources of SBA Loans, which are widely viewed as the most advantageous small business loans on the market. They are also perceived to be more accessible because the SBA guarantees up to 85% of loans up to $150,000 and 75% of loans over that amount and up to $500,000. That’s a pretty significant percentage, so you’d think it would make the bank more likely to approve borrowers who don’t fulfill every bank loan requirement with flying colors.

But as many SBA Loan applicants have found out, the SBA’s guarantee only makes the bank slightly more generous. Banks that offer SBA Loans are not instructed to use more lenient criteria when making approvals. They are fully permitted to apply the same requirements they would for a traditional bank loan. At the end of the day, it is the bank, not the SBA, that approves or rejects your application.

5. Their unsecured loans aren’t for everybody

You may have noticed that, in order to compete with alternative business financing companies, some banks have started offering unsecured business loans. These loans can be approved quickly and the interest rates are still on the lower side. One thing banks cannot (and probably will never) offer, however, is unsecured business loans to businesses under a year old. Businesses that are six months old may be able to get a bank loan but they would need collateral.

Don’t expect banks to stop demanding collateral anytime soon. Experience has reportedly taught them that borrowers who have their equipment or house at risk are more likely to do whatever they can to keep their businesses afloat. And if you don’t need collateral, you’ll almost definitely need at least two years in business. Collateral and time in business are perhaps the two requirements that will always make bank loans less accessible than products of companies like United Capital Source.

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