Avoid the missteps and misfortunes of other loan-seeking entrepreneurs. Strong credit and collateral won't always get you approved, and even if you are successful, not taking time to get acquainted with the banking system can really hurt you. It's very important for an entrepreneur to understand bank financing. Doug Hood of Rainmaker Capital Corp. offers a few guidelines:
1. Make sure you use the right financing strategy. If you need money for inventory, working capital, payroll expenses or other needs to be met within one year, get a short-term loan or line of credit. If you're going to purchase equipment, a building or other fixed assets, get a long-term loan. The goal is to match the term of the loan with the life of the product.
2. Know the difference between a line of credit and a term loan. A term loan is what you use to purchase a fixed asset. A line of credit can be used for ongoing and short-term expenses.
3. Ask how much experience the bank has lending in your industry. If the bank is unfamiliar with your industry or has a history of losses when working with it, that can dramatically reduce your chances of getting a loan.
4. When you ask for a loan, it doesn't hurt to ask for 10 to 20 percent more than you need, in case the banker wants to lend less than your asking amount. But realize you'll have to adequately justify the amount.
5. Negotiate. If the loan is less than you need, tell the banker you'll be back and ask him or her to put in writing what plateau you must reach to get additional money. You can also try to negotiate loan fees. Offer a carrot-such as "If I bring all my company deposits here, can you reduce my loan fees?"
6. Don't be afraid to use your leverage to get what you need, but have the financial stability, cash flow and management experience to back up your position. This is no time for bluffing.
7. Get any verbal promise in writing. If it's not in writing, it didn't happen.