Feb 6, 2014

Posted by Tess Bryson in Financial Services | Comments Off on Basic Information on Getting a Small Business Loan

Basic Information on Getting a Small Business Loan

Many people out there have a dream of starting a small business, but for a majority of those people, they don’t have the money needed to actually get their business going. This is where a small business loan can help. However, a small business loan isn’t something that is easily obtained for some people and there is a lot of information about them that you should be aware of if you are going to apply. Here is some basic information about loans for small businesses that you should be aware of.

Lenders Don’t Like to Give Money Away

Lenders are in the business of  LENDING money, not “giving it away” to small business owners. Why? Because all small business owners, especially new small businesses,  are a risk and lenders need to becarefull on WHO they lend their money too and a big part of that consideration is the risk, basically they don’t want to be risky with their loans.   This is important, just like first impressions or how you present yourself, as lenders judge you based on your risk or perceived risk. You need to know this so you can present  yourself and your business  in a position that reflects a low risk situation when you apply for these loans. There are a number of ways to do this actually. One is, start your business up in some capacity, even if you are only working at home.  Using Quickbooks to create a general income and expense statement shows that your business has income and costs. This shows a “proof of concept”, that your business works, has revenue, and even that it is profitable. This help significantly as you are already ahead of the game when you go to apply. Another thing that you can do is to reach out to a small business advisor, see what they have to say about your situation and heed their advice. In every small town there are CPA and Law firms that help businesses, going in to speak with them about accounting, taxes, and also business structure gives you important information in starting your business. Make sure to get their cards and make sure that you show an interest in perhaps hiring them when your business grows, you will eventually need them. For them, you are a possible new future client and for you they are a resource. Chances are they already represent similar small businesses in your community and can share with you pitfalls, obsiticals, and roads to success that will help you on your way. One last excellent resource is your local Better Business Bureau, they are an excellent resource and usually host events (meet and greets) where you can meet other business owners, lawyers, accounts and even some local bank representatives. Perhaps you can meet a bank representative at a social event, which is far easier to break the ice, then to sit across a desk from them the first time.

Get Some Collateral

You should also know that your chances of getting a small business loan will increase if you have some collateral. Collateral can be a number of different things, from your vehicle or home, to appraised jewelry. The type of collateral you need will be directly depend on the amount of money you wish to borrow. However, the more valuable your collateral, the better your chances will be when it comes to being approved.

A big help in acquiring a business loan is to organize your current bills, loans, and expenses and consolidating any outstanding debt obligations. Banks don’t like to see too many outstanding loans, multiple credit cards with balances, multiple car loans. This shows the bank that you borrow on everything you purchase. Having multiple credit cards with NO balances, one car loan, and one mortgage , while having some items owned outright demonstrates that you have taken responsibility and accountability to pay off items.

Getting a free personal credit report prior to meeting with a loan officer and finding out where you can help consolidate any outstanding balances and improve your credit score can be a tremendous help in securing the loan you need.

Additionally, consolidating debt and freeing up assets that may have debt on them creates collateral.

There is a general rule on collateral, just like waiting in a line for movie tickets or to be seated at a table, it is always about FIRST IN LINE. If you have some debt on ALL your assets (collateral) and wish to use remaining equity as collateral, that means the new loan you are applying for is NOT first in line on the collateral. Being first in line on any collateral always makes those extending you a loan feel MORE safe in lending you the money. They know if that asset has to be liquidated, they are the FIRST to receive money.

The Counter Offer

If a bank rejects your request, ask for a counter offer. This expands the possibility of still launching your business.  If the bank is not willing to give you what you asked for under the requested terms, what will they lend?  If they are willing to fund a 50% of the requested amount, there is a possibility of bringing a passive capital partner to the table.  Another option is using a hybrid option were in the bank funds a potion and then leveraging outside assets in a line / loan combination.  This may result is a substantially lower overall cost of funds increasing the opportunity for business to have a positive cash flow sooner than originally anticipated.  Once your business is cash flowing and producing a documented profit, banks will be more eager to lend at more attractive terms. Case in point, many well know businesses are posting record profits not by growing their business and increasing revenues, but by restructuring and lowering overall debt expense. Same sales with reduced expenses equals record profits.

Consider a Cosigner

Finally, if you don’t have anything that you can use for collateral, or if you don’t have enough assets to back you up, you may also want to consider a cosigner. With a cosigner, you will be able to use their collateral or assets to get a loan, but they will also be responsible for the loan in the event you can’t handle it.  To make a cosigner feel comfortable, you may wish to offer them a contract and make a pledge to them. Perhaps giving them some equity in your business or a small % of the profits for an allotted amount of time would help make the consigner more comfortable and also shows your appreciation for them willing to risk THEIR collateral on you and your business.

The first YES may not be the Finish Line.

The easiest path for small business financing may be the government sponsored SBA programs. These loans frequently have above market rates and excessive fees.  Oftentimes a business start-up is driven by emotion and the excitement of getting the capital to get off the ground may be the very reason for future failure.  If the fees and interest expense is substantially greater than anticipated, there may be stresses causing the inability to adequately staff and the lack of reserves to cover a reasonable ramp up period.  In addition, higher debt costs may drive price points out of the market.  The key here is to proactively develop a plan including the maximum financing expense the business can handle and still succeed. If the first “Yes” does not fit the plan, use the initial approval to attempt to re-negotiate with the lender that issued the approval as well as other lenders using your solid business plan as leverage for better terms.  While banks want you to make money, they also have profit objectives.  However, a non-performing loan or failed business in the community  does not benefit either party.

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