How to Get a Business loan

This guide discusses Getting Loans for Business and Small Business Loans to Start Business. Some business persons cannot understand why a lending institution refused to lend them money. Others have no trouble getting funds, but are surprised to find strings attached to their loans. Such owner-managers fail to realize that banks and other lenders have to operate by certain principles just as do other types of business.

This guide discusses the following fundamentals of borrowing: (1) credit worthiness, (2) kinds of loans, (3) amount of money needed, (4) collateral, (5) loan restrictions and limitation, (6) the loan application, and (7) standards which the lender uses to evaluate the application.

Introduction to Getting Loans for Business

Inexperience with borrowing procedures often created resentment and bitterness. The stories of three business persons illustrate this point.

"I'll never trade here again," Bill Smith said when his bank refused to grant him a loan. "I'd like to let you have it, Bill," the banker said, "but your firm isn't earning enough to meet your current obligations." Mr. Smith was unaware of a vital financial fact, namely, that lending institutions have to be certain that the borrower's business can repay the loan

Tom Jones lost his temper when the bank refused him a loan because he did not know what kind of or how much money he needed. "We hesitate to lend," the banker said, "to business owners with such vague ideas of what and how much they need."

John Williams' case was somewhat different. He didn't explode until after he got the loan. When the papers were ready to sign, he realized that the loan agreement put certain limitations on his business activities. "You can't dictate to me," he said and walked out of the bank. What he didn't realize was that the limitations were for his good as well as for the bank's protection.

Knowledge of the financial facts of business life could have saved all three the embarrassment of losing their tempers. Even more important, such information would have helped them to borrow money at a time when their businesses needed it badly.

This guide is designed to give the highlights of what is involved in sound business borrowing. It should be helpful to those who have little or no experience with borrowing. More experienced owner-managers should find it useful in re-evaluating their borrowing operations.

Is Your Firm Credit Worthy?

The ability to obtain money when you need it is as necessary to the operation of your business as is a good location or the right equipment, reliable sources of supplies and materials, or an adequate labor force. Before a bank or any other lending agency will lend you money, the loan officer must feel satisfied with the answers to the five following questions:

What sort of person are you, the prospective borrower? By all odds, the character of the borrower comes first. Next is your ability to manage your business.

What are you going to do with the money? The answer to this question will determine the type of loan, short or long-term. Money to be used for the purchase of seasonal inventory will require quicker repayment than money used to buy fixed assets.

When and how do you plan to pay it back? Your banker's judgment of your business ability and the type of loan will be a deciding factor in the answer to this question.

Is the cushion in the loan large enough? In other words, does the amount requested make suitable allowance for unexpected developments? The banker decides this question on the basis of your financial statement which sets forth the condition of your business and on the collateral pledged.

What is the outlook for business in general and for your business particularly?

Adequate Financial Data Is a "Must"

The banker wants to make loans to businesses which are solvent, profitable, and growing. The two basic financial statements used to determine those conditions are the balance sheet and profit-and-loss statement. The former is the major yardstick for solvency and the latter for profits. A continuous series of these two statements over a period of time is the principal device for measuring financial stability and growth potential.

In interviewing loan applicants and in studying their records the banker is especially interested in the following facts and figures.

General Information:

Are the books and records up-to-date and in good condition? What is the condition of accounts payable? Of notes payable? What are the salaries of the owner-manager and other company officers? Are all taxes being paid currently? what is the order backlog? What is the insurance coverage?

Accounts Receivable:

Are there indications that some of the accounts receivable have already been pledged to another creditor? What is the accounts receivable turnover? Is the accounts receivable total weakened because many customers are far behind in their payments? Has a large enough reserve been set up to cover doubtful accounts? How much do the largest accounts owe and what percentage of your total accounts does this amount represent?

Inventories:

Is merchandise in good shape or will it have to be marked down? How much raw material is on hand? How much work is in process? How much of the inventory is finished goods?

Is there any obsolete inventory? Has an excessive amount of inventory been consigned to customers? Is inventory turnover in line with the turnover for other businesses in the same industry? Or is money being tied up too long in inventory?

Fixed Assets:

What is the type, age, and condition of the equipment? What are the depreciation policies? What are the details of mortgages or conditional sales contracts? What are the future acquisition plans?

What Kind Of Money?

When you set out to borrow money for your firm, it is important to know the kind of money you need from a bank or other lending institution. There are three kinds of money: short term, term money, and equity capital.

Keep in mind that the purpose for which the funds are to be used is an important factor in deciding the kind of money needed. But even so, deciding what kind of money to use is not always easy. It is sometimes complicated by the fact that you may be using some of the various kinds of money at the same time and for identical purposes.

Keep in mind that a very important distinction between the types of money is the source of repayment. Generally short-term loans are repaid from the liquidation of current assets which they have financed. Long-term loans are usually repaid from earnings.

Getting the Money Needed to Starting a New Small Business. Now that You have calculated your first capital requirements, where
will you receive the money? The primary source is the personal savings. Then relatives, friends, or other individuals may be found
who are willing to"venture" their savings in your business. Before getting too big a share of cash from external sources, remember
you ought to have private control of sufficient to assure yourself ownership.

Once you can show that you have carefully worked out your fiscal Prerequisites and can demonstrate experience and integrity, a
financing institution may be willing to finance part of your working needs. This may be done on a short term basis of from 60 days
to up to one year. Any institution which has money to lend is primarily concerned with safety. The safety might be a business
asset, but if you're just starting the best safety is usually your house or any other private asset.

The next thing the lender will want to see is Some Kind of Business plan. If you complete a business strategy - which includes a
cash flow forecast - the lender will see that you have completed some serious and realistic thinking about your business and be
more likely to think about your request.

Become acquainted with your banker. In selecting a banker consider Progressiveness, attitude toward your business, credit services
provided, and the dimensions and direction policies of the lender. Is your lender innovative? The physical appearance of this
lender may provide you some indication. When the employees are pretty youthful, considering your problems and active in civic
affairs the bank is very likely to be innovative. The character of the lender's advertising may also be an indicator to its
progressiveness.

To succeed the banker should be interested in helping you to Become a better manager, and develop a continuing relationship that
will mean profitable business for you as well as the bank through the years.

Will the lender give you the kind of credit you need? For example, If seasonal accumulations of stock turned into a problem will
the bank create a loan against public or field warehouse receipts? If your funding is tied up in accounts receivable throughout
your heavy selling year, will the lender accept these receivables as security for a loan? Will the bank contemplate a term loan?

Finally, understand the size and management policies of the bank. Will Your maximum conditions fall well within the bank's"legal
limit"? If you plan to do some export company, does it have a currency department? In the event that you or your dealers sell on
installment terms does the bank have facilities for managing installment paper? How deeply is the bank concerned with the growth
and prosperity of your regional community?

When you deal with your banker, then sell yourself. Whether or not you Want a bank loan, also make it a practice to visit your
banker at least once every year. Openly discuss your strategies and difficulties. It's the bank's business not to betray a
confidence. If you require financial aid carefully prepare, in written form, complete information that will present a thorough
comprehension of your entire proposition. Many business-people or prospective small business operators ruin their chances of
obtaining financial help by neglecting to present their proposition properly.

Trade creditor or gear maker, Companies from which you Purchase equipment or product may also provide capital to you in the kind
of extended credit. Manufacturers of store fixtures, cash registersindustrial machinery frequently have financing plans under
which you might buy on an installation basis and pay from future income. You need not pay for the merchandise simultaneously. If
products are for resale, no security aside from repossession rights of the unsold merchandise is involved. But too extended a use
of charge may prove expensive. Usually cash discounts are quoted if a bill is paid in 10, 30, or 60 days. By way of example, a
duration of sale quoted because"2-10; net 30 days" signifies that a cash discount of two percent will be granted if the invoice is
paid within 10 days. If not paid in 10 days, the entire amount is due in 30 days. If you do not take advantage of the cash
discount, you're paying 2% to use money for 20 days, or 36 percent per year. That is high interest. Avoid it.

Among the main causes of failures among companies is Inadequate financing. Should you go into company, remember it is your
obligation to provide, or obtain from other people, sufficient money to supply a firm foundation for the enterprise.

Sharing Ownership With Others. Now that you have decided what Company to begin and how much funds will be required, you might find
it necessary to join with one or more associates to launch the enterprise.

If you lack specific technical or management skills that are of Major value to your preferred business a partner with these
abilities may prove a most satisfactory way to cover the deficiency. If you're extremely proficient in your special area but lack
management training and skills, you might search for a partner with a background in direction. If you may need more startup money,
sharing the ownership of this business is 1 way to get it. Great care ought to be taken in deciding upon a partner. Personality
and character, in addition to ability to render technical or financial assistance, influence the success of a pa333ship.

A partnership may be a mixed blessing. A partner who puts in time Or money has a right to expect a share in running the
enterprise.

In a venture the accountability for the debts of the firm is Unlimited, just as it is in a single proprietorship. Therefore, the
owners are Personally accountable for the company's debts, even in excess of the amount that they Have invested in the business.
In a corporation the liability of the proprietor is limited To the amount that they pay for their shares of stock. A partnership,
like one proprietorship, lacks continuity. Thus, the business terminates upon the Death of the owner or a spouse, or upon the
withdrawal of a partner.