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Types of Financing |
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There
are many different forms of loans available. Use your advisors to
determine what form might be appropriate for your business.
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Short Term. An example of short
term financing would be a retailer involved in a seasonal business.
He may borrow money for 90‑120 days, pay interest during that time,
and then pay off the loan in full.
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Line of Credit. The entrepreneur can borrow against it
when needed, but repayment would be for a longer period of time.
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Factoring of Receivables. Here the bank controls the
collection of the company's accounts receivable, either through
direct deposit or through monthly loans as receivables are
presented.
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Receiving Credit. This is not seasonal, but for
businesses that are in up and down cycles, for example contractors.
This type of loan should not be used for the purchase of assets.
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Long Term Loans. This would be used to buy assets
(trucks, equipment, etc.). The repayment period is usually 3‑5
years. But typically, startup operations have paybacks of 5‑7 years.
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Combination of Long and Short Term. This is called "the
revolver that turns out". Typical uses for this type of
financing would be a high growth phase company to help finance
receivables or build up inventory. Loan is set up for repayment in 3
years, until the business levels out.
If
you don't understand the terminology or jargon of the banking
industry, ask the banker to explain. Find out exactly what you are
getting into. The borrower should ask lots of questions. |
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Build Personal Relationships |
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Relationship banking means finding an individual within the bank that wants
to grow with your business and can offer advice and consultation. The
entrepreneur should contact the business or loan offices of the bank, then
find the individual with a good depth of experience who is willing to work
with the business on a daily basis. This person should also be someone who
is knowledgeable concerning all aspects effecting businesses. We also make
the following suggestions:
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After preparing your documents (business plan), do not
send them in the mail to your banker. Make a personal
appointment with the bank instead.
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Sit down with the banker and walk through your business
plan. Bankers evaluate not only the documentation, but also the
person(s) behind it. Give the banker an opportunity to get to know
you. The better the banker understands your business, the better
equipped he/she is to respond favorably to your loan request.
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Banking Basics
Banks are
businesses too. They have stockholders to whom they must report and
they are highly regulated by federal and state agencies.
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Remember that banks only make a profit for their
stockholders by making sound loans where they can collect up front fees
(points) and also collect interest on the loan as well as recoup the
loan principal.
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In order to have money to loan, they must maintain
adequate reserves (regulated) and may not be able to lend more money
until more deposits are made. (This is one reason they ask that
all your accounts be lodged with them.)
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The SBA does not lend money. It only provides a
guarantee to banks on risky loans. In the event that you default
on an SBA guaranteed loan, the bank may have the SBA (federal
government) make good on all or some of the principal.
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Banks may be prohibited or will not lend to certain
industries based on their corporate policy, so be sure to ask the
following questions before formally approaching a bank:
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Do you lend on these kinds of projects?
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Are you lending now? (Can the bank actually make more
loans now?)
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Under what conditions are you making these loans?
(Interest coverage ratios, etc.)
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What information do you need to consider my request?
(Get their checklist)
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What is the time frame usually associated to complete a
loan of this type?
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After you have this
information, go and develop your
business plan and
associated documentation.
Establishing Good Credit
If you have not already done so,
obtain copies of your personal credit history from the various reporting
agencies in your area and be sure to include the national services such as
TRW and Equifax. Also obtain a copy of a Dun and Bradstreet Report on
your business. These will give you valuable insights into your
potential for obtaining financing.
If there are errors, omissions or
incorrect entries, each agency will provide you with a means of correcting
these items. Many times, a divorce, natural disaster, or major economic
recession where your customers left you large un-collectible fees have
caused you problems. You are allowed to have each agency place your
letter of explanation in the file so that it becomes public record.
Note: do not fudge here; filing a false financial statement can have serious
criminal consequences.
Credit cards, while a valid need
in today's society affects your credit rating, even if they have a zero
balance. The bank must consider that a potential liability even though
it is unused. So $100,000 in available credit at the 19.8% level on
your cards can prevent you from obtaining a much lower interest rate loan at
the bank. Establish a credit line with your bank and then eliminate
the cards.
To establish or re-establish your
credit rating, first find a commercial lending officer you can work with
comfortably. Next arrange a small business or personal loan and pay it
off early. Continue this process with two other banks in your area.
If you can get all three loans at
once, simply use the money from one to pay off the others. You can use
this technique to obtain progressively larger loans. At one point in
the future, you may be able to get a signature loan for $100,000.
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