Loans & Financing for Small Businesses

How to get the money you need to build and sustain your businessphoto
By: Michael Sanibel

Overview

Many businesses have found it more difficult to obtain financing since the bursting of the credit bubble in 2008. Banks and other lending institutions have tightened up their lending policies, and there are more hurdles to clear to get loans approved. Some banks may require a formal business plan before considering your loan application with the goal of reducing their risk. This article will suggest possible actions to improve your chances of obtaining loan approval.


U. S. Government programs

A popular myth is that the U. S. government offers grants to start or expand small businesses. The reality is that most grants are awarded to nonprofit groups, academic institutions, and government agencies at the state and local level. They are typically focused on doing things for the public good, rather than private enterprise. Depending on the state, there may be economic development grants available that have been passed down from the federal government. In most cases, the purpose of such grants is very restrictive and will not apply to your specific business. Therefore, grants are rarely a viable financing option.

The Small Business Administration [http://www.sba.gov/] does not make loans directly, but guarantees loans for start-ups and operating small businesses. On March 2, the president signed legislation that extends the window to March 28 for the SBA to provide small business loans with special features of the American Recovery and Reinvestment Act. The SBA will guarantee 90% percent of loans (up from 75%) and will waive loan fees that ranged from 2% to 3.5%. The extension authorizes the higher guarantee levels through March 28, 2010 for certain SBA loans, and the fee relief is available until the additional $1.8 billion funding is exhausted or September 30, 2010, whichever comes first.


Key factors for commercial loan approval

As a small businessperson, your character is on the line since you will be the one to spend the money and repay it over time. The lender will assess your trustworthiness through a variety of methods such as personal references, credit history, educational background, and prior business experience. They will also look at the amount of personal capital, both time and money, that you have already invested in the business. Capital indicates confidence in your business and that you have a vested interest in its success. The lender will also evaluate your net worth, equity value of the business, and cash flow in order to determine your ability to make loan payments.

Another factor is the business assets that may be pledged as collateral to secure the loan. These might include real estate, facilities, equipment, accounts receivable, and inventory. Banks don’t want your assets but they may want insurance, especially if they have never done business with you before. If you don’t need a large sum of money, you may be able to get a signature loan, but be prepared to pay a higher interest rate to offset the added risk.

The lender will evaluate current and forecasted business conditions, which is the type of information that would be included in a business plan. This will be based on such factors as the competitive landscape, current liabilities, existing customer base, and the external economic environment. This will be accomplished in light of the purpose of the loan and its predicted impact to your business. For example, if you are using some of the money to purchase additional equipment to expand your business, that will be incorporated into the sales and revenue forecast. It all boils down to your ability to pay, and convincing your lender that you are a reasonable risk.


Preparation

Rather than mailing in your loan application, meet personally with your chosen banker and present a professional image that will instill confidence and a favorable first impression. When assessing risk, some bankers place as much emphasis on you as they do on your business. If you come to the meeting unprepared and unorganized, they will notice. This checklist is a summary of talking points you should have in writing and on the tip of your tongue:

Business Plan. This helps, but if you don’t have one, be prepared to discuss the nature of your business and why the loan is needed. If the bank uses business codes in its loan processing, make sure the code is applicable to your business. Some banks use an automated credit scoring program which removes subjectivity by relying on established financial algorithms. Find out if your bank uses such a computer model, and discuss the implications before submitting your loan application.

•What you plan to do with the money. Talk specifics, not generalities. If you are buying equipment, have a price list available that shows what you are buying, cost per item, and delivery schedule. If the loan covers your rent for the first six months, have a copy of your lease. If you say it’s for "general operating expenses,” you will probably be asked for more detail, so be prepared.

Credit report. While the bank will obtain this independently, you should review it in advance to make sure it’s correct. You can get one for free, and it will enable you to address any concerns that the lender has based on what they may have already seen.

Personal financial statement. Your net worth is a solid measure of risk should your business not become profitable as soon as expected. Bring a list of your current assets and liabilities. The unencumbered assets might be considered as collateral for the loan.

Past tax returns. Bring your personal returns for the past few years, or your business returns if you have any.

Expertise and experience. The importance of this can’t be overstated. You want to demonstrate to the lender that you have a thorough understanding of your business and have what it takes to run it successfully. Many lenders, especially the smaller community and specialty banks, rely as much on their gut instincts as they do on the raw numbers. Explain how you will manage the money as though it’s your own, and show them your budget [http://www.artisansmonthly.com/2010/03/budgeting-for-small-business.html] to prove it.


If your loan is disapproved

You have the right to know the specific reasons why your loan was denied. If it was because of a poor credit report, ask for a copy of the specific report(s) referenced in the rejection notice. If you find errors or omissions, get them corrected by the credit bureaus and put the lender on notice in writing. If the lender relied on appraisals, interviews, or outside experts in making the decision, ask to see those inputs. Find out if there is anything you can do that will shed additional light or provide a positive influence. If you still believe that your loan was disapproved without proper justification, ask to escalate the matter to senior bank executives. If that fails, review your preparation checklist, see if you can strengthen and improve it, and consider applying to a new bank.

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Michael Sanibel (http://www.michaelsanibel.com/) is a freelance writer specializing in business, finance, law, science, aviation, and political analysis. He graduated from the United States Air Force Academy and is also licensed to practice law in California and New Hampshire.