The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Information on this website may not be current. This website may contain links to other third-party websites. Such links are only for the convenience of the reader, user or browser; we do not recommend or endorse the contents of any third-party sites. Readers of this website should contact their attorney, accountant or credit counselor to obtain advice with respect to their particular situation. No reader, user, or browser of this site should act or not act on the basis of information on this site. Always seek personal legal, financial or credit advice for your relevant jurisdiction. Only your individual attorney or advisor can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, contributors, contributing firms, or their respective employers.
Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them. Compensation is not a factor in the substantive evaluation of any product.
If you are among the 40% of baby boomers AARP says plan to work until they die, and if you plan to start or buy a business instead of working for someone else, your venture will likely involve some sort of financing. Unless you plan to fund this enterprise solely with savings—not recommended unless you are fabulously wealthy—you’ll need a business loan.
As any lender can tell you, the better prepared you are before making your request for business credit, the greater the likelihood of getting approved.
Part of this preparation is understanding what bankers will need to approve you. Banks make a major portion of their profits from loans. They’re not in the business of saying no; they just say it when your application doesn’t meet lending requirements, which are much stricter now than before the financial crisis. But be aware that start-ups are almost always considered risky bets, and many lenders are reluctant to finance them. Also know that many larger banks won’t even consider small loans, which are less profitable than larger loans but require the same amount of time to analyze and administer. Don’t let these discourage you. Get organized.
How small is small? According to the Small Business Administration (SBA), the median small business loan from a financial institution is roughly $135,000, with highest around $250,000. SBA loans, which are not underwritten by the US Government but by SBA partners (lenders, community development organizations and microlending institutions), range from $5,000 (a microloan) to $5 million, with the average around $371,000.
So what exactly are lenders looking for? Basically, they’re searching for clues that your business will be able to repay the loan, plus interest, with metronomic regularity. Most financial institutions will expect the loan to be fully secured, either with business assets or personal collateral. Having some skin in the game, meaning you have your own equity invested in the business, strongly works in your favor.
Lenders also will be looking at opportunities to profit from your success, so as your business grows, so will your business relationship. The buzzword in banking circles these days is cross-selling, so your business loan provider may also seek to be the issuer of your business’s credit cards and holder of your treasury accounts.
Lenders will also be looking at you—your personal finance record, your credit score, your assets, your work experience, and your character. If you’re starting a business for the first time, having partners with the experience and track record that you lack may also be a requirement.
Once you’re ready to make your request, ask the financial institution for the documentation it requires. Then, be prepared to answer the questions, in depth, for each of the categories listed below.
What will the funds be used for? (Note that banks won’t lend for speculating, passive investments, pyramid sales or gambling.)
How much money do you want to borrow? Why that particular amount?
For how long will you need the money and what is your specific plan for repayment?
What assets, business or personal, do you intend to use as collateral? What is their market value? What portion of their value can you use as collateral?
Your current, complete business asset and liability financial statements (your balance sheet).
Your current, complete business statement of income and expenses (your profit and loss statement, or P&L).
Your written plan for your business including goals and action steps, timetable, resource allocation, funding required, and related financial data. You may be asked for cash flow projections for at least a year.
Past business financial performance information under your ownership or under the previous owner’s ownership.
Information about you (your C.V., your loan Guarantor—someone who will pledge his/her assets and financials to guarantee repayment of the loan should you default. Guarantors can be a legitimate tipping point factor in getting a “yes” to the credit request.
What do you do if you get a no? Don’t give up. Pursue the reasons for the rejection. Was it a procedural thing—a missing piece of information on the application—or something else? Then ask what would it take to get a yes. You can then either alter your request accordingly and resubmit it, or take it elsewhere.
If you keep hitting a brick wall, consider alternative sources of funding. Many entrepreneurs seek out financing from family and friends. Some use their available credit from credit cards or home equity lines of credit to finance their businesses. If your “no” comes from a commercial bank, consider community banks and credit unions, many of which specialize in small business loans. You may also want to look into alternative sources of business credit, like Kabbage.com, which offers cash “advances” of between $500 and $50,000 to businesses that already have a performance record, such as online sales. If you do decide to go online to fund your business, be sure you understand all of the terms and conditions of the financing, as they can differ from conventional small business loans.
Image: iStock
March 11, 2021
Personal Finance
March 1, 2021
Personal Finance
February 18, 2021
Personal Finance