Obtaining Your First Bank Business Loan

Understanding the Importance of a Bank Business Loan: Securing a bank business loan, especially one that reports to business credit agencies like Equifax and Experian, is a significant step in establishing your business’s creditworthiness. It signals to other lenders and creditors that your business is reliable and capable of handling financial responsibilities.

How to Secure a Bank Business Loan:

  1. Using a Certificate of Deposit (CD) as Collateral: You can open a CD with an SBA preferred lending bank and then secure a business loan for 100% of the CD’s value. This method is effective as long as your personal credit is in a reasonable state (preferably not in the low 500s).
  2. Finding the Funds for the CD: The required amount for the CD deposit doesn’t have to be substantial; starting with as little as $5,000 is feasible. Consider various sources like personal savings, loans from family and friends, or other creative funding methods.

Benefits of a Secured Bank Loan:

  • It’s reported on your business credit report like any other loan.
  • It doesn’t get marked as “secured” on your credit reports.
  • Enhances your credit profile, making your business more attractive to other lenders.

The Concept of Comparable Credit: Comparable credit means having a loan amount that is similar to what you’re asking a new lender for. For example, if you secure a $25,000 line of credit using the CD method, it shows potential lenders that another institution has trusted you with a significant loan amount, making them more likely to offer you credit.

Strategy for Using Comparable Credit:

  • Borrow a sum (like $25,000) personally and use it to open a CD.
  • Secure a business line of credit against this CD.
  • Other lenders see this credit line, increasing your chances of getting more credit offers.

Advantages:

  • The CD used as security might be released after 12-18 months of timely payments, freeing up those funds.
  • Repaying the personal loan can boost your personal credit scores.

Suggestion for Borrowing from Friends or Family: If you borrow the initial funds, you can assure the lenders of repayment:

  1. Use the borrowed money to open the CD and secure the loan.
  2. Deposit the loan amount into a separate account and use it to repay the loan.
  3. After the final payment, you can return the borrowed money with interest.

If You’re Not Ready or Unable: If securing a CD-backed loan isn’t feasible for you right now, don’t worry. Building business credit can still proceed without this step, though having such a loan can expedite the process. You can always consider this option later when your business is more established.

Your Next Step: Evaluate your current situation and decide if setting up a secured bank CD loan is a viable and beneficial step for your business at this moment. Consider your ability to secure the necessary funds for the CD and the impact this step could have on your business credit building process.