Loans, Insurance & credit card information

Have all your ducks in a row.

You have a product, have written your business plain and sales pitch and even found a great location, now you need financing to get your new business off the ground. It takes money to make money; this is an old adage that is even truer today as it was in days past. Here you are, all set to go but, you don’t have available cash, your relatives are as broke as you and friends run at the mere hint of borrowing money.

Your only alternative for backing is a Financial Institute. The only problem is you have never had any association, with a Financial Institute and don’t know what to do. Your hands are tied, and it is clear your local banker is your only choice for funding.

Getting past the loan application.

Passing the scrutiny of a financial institution can be intimidating to say the least. There are some simple steps to follow that will greatly improve your chances for obtaining the funding you need.

Desire is yours, not the bankers

Most entrepreneurs know their product and have a great desire but the fact is, most will have experiences and loan turndowns simply because of poor communications and education. The banker’s lack of information about your business intent and needs and your not supplying correct information result in his/her not having a clear picture of your intent. You must learn the bank’s procedures, policies and constraints before discussing financing with the lender.

Consider the bankers position

First, consider the banker. Bankers are trained to always require two sources of repayment: the primary source such as, cash flow for short-term loans, and earnings for long-term loans. This should be backed up with some sort of collateral, such as accounts receivable, inventory, or a mortgage on fixed assets. Then if the business venture goes south from the original plan, the banker has at least one position to fallback on.

Can you guarantee the loan?

The banker may also require a personal guarantee from you as the business owner. A personal guarantee is also required of a major stakeholder or partner depending on the business description. A sole proprietor guarantees by virtue of his/her signature of a note. Another scenario where a guarantee may be requested is in the case of a non-involved spouse, who is the joint owner of the other personal asset of the businessperson. i.c. a jointly owned home being used as collateral.

Is this blatant overkill on the part of the lender? Why should they require three sources of repayment? Your banker does not necessarily expect to gain a great deal of financial security from your personal signature but, he/she wants your total commitment and support to making the business successful and thus securing his/her loan.

Remember, the banker is an employee of the bank. If to many bad loans are made, he/she will lose his/her job. Your banker doesn’t want to take a chance on a loan if you are hesitant to back it up with personal assets. If you are not unwilling to commit, the confidence of the banker is reduced significantly.

The five Cs and more

Your banker evaluates your loan request using the “five Cs of Credit”.

1. Character – by far the most important If you are not someone to be trusted, then the bankwill not want to deal with you, no matter how good your deal looks. Character also includes your past credit history and that of any principals involved.

2. Capacity – What is your financial strength, track record, and ability to service debt based on your projection.

3. Capital – how much of our own money do you have invested?

4. Collateral – What is available to support the primary source of repayment?

5. Conditions – what is the economy doing, and how will it affect your business? Conditions also include governmental and industry regulations, pending legal action affecting your venture, and the company’s marketing plan.

Finally, here are some do’s and don’ts that when applied, will help to strengthen your banking relationship.

Do:

a) Make an appointment and allocate enough time.

b) Be completely honest. Tell the good and bad.

c) Be prepared. Anticipate the worst and best scenario.

d) Ask questions if you don’t understand something.

e) Have a definite plan based on industry averages, your familiarly with the business you are starting, if any past operation history, reasonable assumptions, etc. but be flexible.

f) Keep your banker informed.

g) Negotiate rates after you’ve presented the loan request, keeping in mind the most important thing is that you get a loan, and at least initially, not the rate you pay.

Do Not:

a) Be impatient.

b) Make promises you can’t keep.

c) Ask “how much” you can borrow.

d) Negotiate interest rates over the telephone.

e) Spend the money before you ask for it.

f) Change banks soley for a better interest rate, unless your bank is not competitive.

g) Surprise your banker.

Money makes the business go.

Without funding your business may die before it gets started. The funding process is essential to the health of your new business. Unless you have money, or a rich uncle you will have to acquire money from a lending institution, grant, or stake holder. Do not rely on credit cards for funding. Because of high interest, Credit cards are not a good source for funding.

Start up businesses take up to three years before they show a profit. Taking this into consideration, make sure you are funded to survive the start-up time frame.

Be prepared.

Before you go to your banker be sure you have a sound business plan, statement of purpose, marketing plan and one, five and ten year projections. Be confident in your calculations and projections. Be sure you let your banker know you are responsible for supplying future progress reports to him/her. If you have an accountant, take him/her along for your loan interview. Your banker may better relate to someone who is on his/her same level of expertise.

Happy Trails

Have you noticed that the housing market right now is over-heated and are collapsing and dragging some commercial banks down as well? All the same, commercial banks are still giving out loans but they are now very strict and there are some few elements now that you must meet before you can be approved for a business loan.

Before now, private lending was more liberal and forgiving and banks were giving out loans easily; the result is the current financial mess in the money market and as a result to get a business loan from the commercial banks are difficult but if you arm yourself with the required information and elements, you will definitely get approved for the loan you seek.

You need hard capital; these are the assets like real estate or machinery belonging to the business. The banks can give loan secured by these assets so that in case the business is not able to meet up with repayment of the loan, the bank can sell off these assets to recover their money. Note that the banks do not like this practice on a normal condition so this alone will not earn you the loan.

You need collateral; this is not the same as the first, it is the assets owned by the owner of the business; like their homes and stocks. You can call it a personal guarantee that allows the bank to shift the risks to the owner of the business and at the same time checking the seriousness of the owner of the business.

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