NFIB

How to Get a Loan from a Bank to Start Your New Business
04/ 11/ 2002


Banks love collateral. They swoon over profits. And they get positively dizzy over long-term performance records. Because of this, it's difficult to get a loan from a bank to start a new business, which has very little if any collateral, no profits as yet, and by definition no long-term performance. However, in this Workshop, Jeff Moses will discuss what you'll need to maximize chances of a loan and alternatives to consider should your initial loan application be rejected.

--To have any chance for a bank loan, you'll need a well-constructed business plan. There are set formats for such plans, and you should carefully consult manuals or books to make sure that every detail required is accounted for in your plan. Then go over it with an attorney or CPA before you show it to your banker.

--Your personal credit history can play a factor in a business loan. This is normally part of your business plan. But be extremely wary of putting up personal assets as collateral for a loan. You may be sure that your business will succeed, but you don't want to lose the house if something beyond your control occurs.

--A good business plan will include most or all of the following items of information, plus any others that pertain to your specific business or geographic region: the amount of money you are asking for; the specific nature of the business; the experience of you and your partners in the specific field; general business experience of you and your partners; personal credit and financial histories of you and your partners, including tax returns for previous 3-4 years, etc.

--Even though banks are extremely conservative by nature, never underestimate the power of your personal relationship with your banker. After reviewing your plan and interviewing you and your partners, your banker will likely take the information as a "packet" to the bank's daily or weekly planning meeting and present it to the group. A good personal recommendation from the person who interviewed you could tip the balance in your favor if the voting among the group is close.

--If the bank rejects your proposal, ask your banker about other types of loans, such as lines of credit, secured loans, or financing of receivables.

--A line of credit gives you or your business credit up to a specified, pre-determined maximum. You can then borrow against that at the determined interest rate. When you borrow to the full extent of the line of credit, you'll have to pay off some or all of the amount, but will then be able to borrow up to the maximum again. Of course, you don't have to borrow to the maximum. You can use a line of credit to tide you over in times of cash-flow shortage.

--In a secured loan, you or your partners will need to pledge assets to the bank as collateral for the loan. This will allow the bank to take over the assets in place of payment if you can't pay off the loan. Assets could include homes, investments, cash, etc.

--The financing of receivables (variously called "receivables financing" or "accounts receivable financing") enables you to receive a loan based on upcoming payments from customers for sale of goods or services. You would pay back the loan upon receipt of the payments. In effect, this is a type of secured short-term or interim loan, because the bank will be able to force the customers to pay their bills if you default. There is risk in this to the bank, of course, no matter how well you know your customers and count on their good faith.

--Many a new business has been started with a loan based upon a contract with a customer. For instance, you may have experience working for a large company, then want to go out on your own. It could turn out that your former company needs your products or services, and will draw up a contract for them. Be sure to write in all the financial terms of the arrangement, including time-frame, amount of purchases, etc.

--There are numerous alternatives available for those wishing to start a small business. The Small Business Association (SBA) frequently guarantees loans, meaning that a bank will be assured of receiving payment. But be aware: usually the SBA guarantees to repay only a percentage of the loan (75% or more), so there is still substantial risk to the bank. Your presentation to the SBA will be much as to a bank, with all the above-mentioned business and personal information required. The SBA can be contacted at 800.827.5722 to find the SBA office nearest you. Complete information is also available online at www.sba.gov.

workshop.accounting.tue
5.18.1999

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