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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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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.
Have a Professional
Business Plan
As for
what your business plan should
include, our business banker Mr. Steve Morse of City Bank, Honolulu, Hawaii,
offers these important business plan considerations:
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Your business plan should
include an extensive background section which should tell the lender
what you're about, key personnel, stockholders, etc.;
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A listing of experience and
educational background information;
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Nature of your business,
i.e., what markets you service, product and services you sell,
geographic territory, what your business does;
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How you deliver your
product/service to your customers;
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Detailed financial analysis.
This should include a 3‑5 year‑end financial statement, and audit or tax
returns. Also, information should be supplied year to date. Make all
projections realistic and make the banker understand you understand your
business;
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If you are applying for a
loan, present a professionally
prepared package. Make the package correspond to the nature of
your business and loan requirements.
Build Personal
Relationships...
Establishing Good Credit...
After the Loan: Maintain Good Communications...
The Four C's of Commercial Lending...
What Does the Bank Look for in Making a
Decision...
Documentation Required to Process a
Commercial Loan...
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