How
to obtain commercial loans for start-up businesses and for expansion
plans
Banks
make money by lending money. However, the financial inexperience
of many hopeful new business owners often dissuades banks from
granting them a commercial loan.
Requesting a loan when not properly prepared conveys to the lender
that you are a high-risk borrower. To successfully obtain a loan
you must be prepared and organized. You must know exactly how
much money you need, why you need it, and how you will pay it
back. You must be able to convince your lender that you are good
credit risk.
Banks
look for specific criteria as bare minimum requirements before
even considering lending to a start-up company. Often a bank will
consider the following:
Ability
to repay
To ensure a start-up owner's ability to repay a commercial loan,
a bank might require collateral of nearly 85% to 90% of the loan
value. In a start-up business, a commonly used source of collateral
is the equity value in real estate, such as your home. Other possible
collateral sources are inventory, accounts receivable, equipment,
and securities.
Solid
business plan
A business plan generally contains a description of the
prospective business operations, competition, management ability,
marketing efforts, and financial projections for three years,
including a cash flow projection and personal balance sheet demonstrating
the worth of the business. A business plan also identifies for
the lenders, your anticipated goals and also serves as a resume
for the owners and management team of your start-up. Read
more information about the steps required to prepare your
"business plan". Our firm also highly recommends
using the excellent software by “Business
Plan Pro” which is probably one of the best on the market.
Extensive
personal investment in the start-up
Personal assets of the founders are usually the initial source
of financing. Savings accounts, loans or mortgages collateralized
by equity in the family home and auto, marketable security investments,
and loans on cash surrender values of insurance policies, are
among the available personal resources. Banks expect start-up
businesses to risk their own funds in the beginning, asking at
the very least that businesses provide 25% of the needed capital.
Banks simply won't take a risk when the business owner has not.
We presume that you have some accumulated financial assets
based on your previous investment strategies, and we have
found that producing some record or information of your past investment
dealings, produces positive results. Our advice on solid investments
guidelines is covered on our web page, read
more
Good
credit history
As start-up, you must justify your ability to make periodic installments
on a loan. Start-up founders with a shaky credit history, either
personally or professionally have little chance of acquiring a
loan. Obtain your own credit report before applying for a loan
so there are no surprises. If there are any inaccuracies or problems,
address them before submitting the loan application. Some of the
most common credit reporting agencies includes
Equifax, or Trans
Union, and Experian.
If you have had problems with your credit in the past, we recommend
that you research on how to rebuild a good credit rating
click
here
Strong
character
A bank considers such intangibles when estimating character, as
prior business experience and existing or past relationship with
the lender, and references from professionals such as accountants,
lawyers, and business consultants who have reviewed your business
plan. Additionally the care and effort you put into the business-planning
process suggest your passion, persistence and level of commitment.
This
is a positive step
It's
comforting to know that funding from the government has
actually increased the ability of start-ups to obtain commercial
loans. The objective of these programs is to assist businesses
that can't get a loan elsewhere. The direct-loan program requires,
depending on capitalization size, or the area of the business,
and one or two rejections by banks as a prerequisite. Some funds
are actually Grants and Free Money for qualified
applicants.
Both
large and small financial institutions, and several non-bank entities
in the Rocky Mountain region of the USA, actually fight over business
when you apply for a SBA loan. The opportunity to
finance SBA loans are made under its "guaranteed loan
program", banks do not lose as much money if you fail
to repay your loan. What funds are available?
In
order to obtain an SBA loan, the business submits a loan application
to a lender {usually a bank, but increasingly a non-bank entity}.
If the lender approves the business submits the application to
the SBA. If the SBA approves, the private lender makes the loan,
which the SBA can guarantee up to a maximum of $750,000. Visit
our page outlining the sources for commercial loans.
Next
Level Up
A leading cause of business failure is insufficient capital. Even
after obtaining an initial commercial loan, you will need to devote
considerable attention to attracting the capital necessary for
a local, regional, national or international launch. In preparation
for seeking additional funding, continue to refine your business
plan. Also build on the requirements that enabled you to obtain
you initial commercial loan; ability to repay, solid business
plan, extensive personal investment in the company, good credit
history, and strong character. If you needs further advice or
assistance contact
us.
This
material was adapted from an article in the Utah Business magazine
