Short-Term Bank Loans

You can use short-term bank loans for purposes such as financing accounts receivable for, say 30 to 60 days. Or you can use them for purposes that take longer to pay off - such as for building a seasonal inventory over a period of 5 to 6 months. Usually, lenders expect short-term loans to be repaid after their purposes have been served: for example, accounts receivable loans, when the outstanding accounts have been paid by the borrower's customers, and inventory loans, when the inventory has been converted into salable merchandise. Small Business Loans to Start Business

Banks grant such money either on your general credit reputation with an unsecured loan or on a secured loan.

The unsecured loan is the most frequently used form of bank credit for short term purposes. You do not have to put up collateral because the bank relies on your credit reputation.

The secured loan involves a pledge of some or all of your assets. The bank requires security as a protection for its depositors against the risks that are involved even in business situations where the chances of success are good.

Term Borrowing

Term borrowing provides money you plan to pay back over a fairly long time. Some people break it down into two forms: (1) intermediate - loans longer than 1 year but less than 5 years, and (2) long-term - loan for more than 5 years.

However, for your purpose of matching the kind of money to the needs of your company, think of term borrowing as a kind of money which you probably will pay back in periodic installments from earnings.

Equity Capital

Some people confuse term borrowing and equity (or investment) capital. Yet there is a big difference. You don't have to repay equity money. It is money you get by selling a part interest in your business.

You take people into your company who are willing to risk their money in it. They are interested in potential income rather than in an immediate return on their investment.

How Much Money?

The amount of money you need to borrow depends on the purpose for which you need funds. Figuring the amount of money required for business construction, conversion, or expansion - term loans or equity capital - is relatively easy. Equipment manufacturers, architects, and builders will readily supply you with cost estimates. On the other hand, the amount of working capital you need depends upon the type of business you're in. While rule-of-thumb ratios may be helpful as a starting point, a detailed projection of sources and uses of funds over some future period of time - usually for 12 months - is a better approach. In this way, the characteristics of the particular situation can be taken into account. Such a projection is developed through the combination of a predicted budget and a cash forecast.

The budget is based on recent operating experience plus your best judgment of performance during the coming period. The cash forecast is your estimates of cash receipts and disbursements during the budget period. Thus, the budget and the cash forecast together represent your plan for meeting your working capital requirements.

To plan your working capital requirements, it is important to know the "cash flow" which your business will generate. This involves simply a consideration of all elements of cash receipts and disbursements at the time they occur. These elements are listed in the profit-and-loss statement which has been adapted to show cash flow. They should be projected for each month.

What Kind of Collateral?

Sometimes, your signature is the only security the bank needs when making a loan. At other times, the bank requires additional assurance that the money will be repaid. The kind and amount of security depends on the bank and on the borrower's situation.

If the loan required cannot be justified by the borrower's financial statements alone, a pledge of security may bridge the gap. The types of security are: endorsers; comakers and guarantors; assignment of leases; trust receipts and floor planning; chattel mortgages; real estate; accounts receivables; saving accounts; life insurance policies; and stocks and bonds. In a substantial number of States where the Uniform Commercial Code has been enacted, paperwork for recording loan transactions will be greatly simplified.

Endorsers, Co-makers, and Guarantors

Borrowers often get other people to sign a note in order to bolster their own credit. These endorsers are contingently liable for the note they sign. If the borrower fails to pay up, the bank expects the endorser to make the note good. Sometimes, the endorser may be asked to pledge assets or securities too.

A co-maker is one who creates an obligation jointly with the borrower. In such cases, bank can collect directly from either the maker or the co-maker.

A guarantor is one who guarantees the payment of a note by signing a guaranty commitment. Both private and government lenders often require guarantees from offices of corporations in order to assure continuity of effective management. Sometimes, a manufacturer will act as guarantor for customers.

Assignment of Leases

The assigned lease as security is similar to the guarantee. It is used, for example, in some franchise situations.

The bank lends the money on a building and takes a mortgage. Then the lease, which the dealer and the parent franchise company work out, is assigned so that the bank automatically receives the rent payments. In this manner, the bank is guaranteed repayment of the loan.

Warehouse Receipts

Banks also take commodities as security by lending money on a warehouse receipt. Such a receipt is usually delivered directly to the bank and shows that the merchandise used as security either has been placed in a public warehouse or has been left on your premises under the control of one of your employees who is bonded (as in field warehousing). Such loans are generally made on staple or standard merchandise which can be readily marketed. The typical warehouse receipt loan is for a percentage of the estimated value of the goods used as security.

Finding the Cash Required to Starting a New Small Business. Now that You have computed your initial financing requirements, where
will you receive the money? The primary source is your personal savings. Subsequently relatives, friends, or other individuals may
be found who would like to"venture" their savings in your business. Before getting too large a share of cash from external
sources, remember you should have personal control of sufficient to assure yourself possession.

Once you can show that you have carefully exercised your fiscal Requirements and can demonstrate expertise and integrity, a
financing institution may be willing to finance part of your operating needs. This could possibly be done on a short term basis of
from 60 days to as much as one year. Any institution which has money to give is mainly concerned with safety. The security might
be a business advantage, but when you're just starting the ideal security is usually your home or some other personal advantage.

The second thing that the lender will want to see is some sort of Business plan. If you finish a business plan - which includes a
cash flow forecast - the lender will see that you have done some serious and realistic thinking about your business and be more
inclined to consider your request.

Be familiar with your banker. In selecting a banker consider Progressiveness, attitude toward your business, credit services
offered, and the size and direction policies of the lender. Is your bank innovative? The physical appearance of the bank may
provide you some indication. When the workers are pretty youthful, considering your problems and active in civic affairs the bank
is very likely to be innovative. The character of the bank's advertising might also be a clue to its progressiveness.

To be effective the banker Ought to Be interested in Assisting You to Become a better manager, and develop a lasting relationship
that will mean profitable business for you and the lender through the years.

Will the bank offer you the kind of credit you need? For example, If seasonal accumulations of stock become an issue will the bank
make a loan against public or field warehouse receipts? If your capital is tied up in accounts receivable throughout your heavy
selling season, will the lender accept these receivables as collateral for a loan? Will the lender consider a term loan?

Finally, understand the size and direction policies of the bank. Will Your maximum requirements fall well within the bank's"legal
limit"? If you intend to do some export business, does it have a foreign exchange department? If you or your traders sell on
installation terms does the lender have facilities for managing installment paper? How profoundly is the bank concerned with the
rise and prosperity of your regional community?

When you deal with your banker, then sell your self. Whether or not you Need a bank loan, also make it a practice to stop by your
banker at least once every year. Openly discuss your strategies and difficulties. It's the bank's company not to betray a
confidence. If you require financial aid carefully prepare, in written form, complete information that will present a
comprehensive comprehension of your entire proposal. Many business-people or prospective business operators destroy their chances
of getting financial help by failing to present their proposition properly.

Trade creditor or equipment manufacturer, Firms from which you Buy equipment or merchandise may also provide capital for you in
the form of extended credit. Producers of store fixtures, cash registers, and industrial machinery frequently have funding plans
under which you might purchase on an installment basis and pay from future income. You don't need to cover the merchandise at
once. If products are for resale, no safety other than repossession rights of the unsold goods is involved. However, too long a
use of charge can prove expensive. Usually cash discounts are quoted if a bill is paid within 10, 30, or 60 days. For instance, a
duration of sale quoted as"2-10; net 30 days" signifies a cash discount of 2 percent will be awarded if the bill 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 money discount, you are
paying 2 percent to use money for 20 days, or 36 percent per year. This is high interest. Avoid it.

One of the main causes of failures among companies is Inadequate funding. Should you enter company, remember it's your
responsibility to provide, or obtain from other people, sufficient money to provide a firm foundation for your business.

Sharing Ownership With Others. Now that you have determined what Company to begin and how much funds will be required, you might
find it necessary to join with a couple of associates to establish the enterprise.

If you lack specific management or technical skills that are of Major importance to your preferred business a partner with these
abilities may prove a most satisfactory way to pay the deficiency. If you're very proficient in your particular area but lack
management training and abilities, you might look for a partner using a background in direction. If you may want more startup
money, sharing the ownership of this business is 1 way to get it. Fantastic care ought to be taken in deciding upon a partner.
Personality and temperament, as well as ability to render technical or financial aid, affect the success of a pa333ship.

A partnership may be a mixed blessing. A partner who places in time Or cash has got a right to expect a share in conducting the
enterprise.

In a partnership the accountability for the debts of the firm is Unlimited, just as it's in a single proprietorship. Therefore,
the owners are Personally responsible for the company's debts, even in excess of the amount that they Have spent in the
organization. In a business the liability of the proprietor is Limited To the amount they pay for their shares of stock. A
partnership, such as a single proprietorship, lacks continuity. Thus, the Company terminates upon the Death of the proprietor or a
spouse, or on the withdrawal of a partner.