Trust Receipts and Floor Planning

Merchandise, such as automobiles, appliances, and boats, has to be displayed to be sold. The only way many small marketers can afford such displays is by borrowing money. Such loans are often secured by a note and a trust receipt.

This trust receipt is the legal paper for floor planning. It is used for serial-numbered merchandise. When you sign one, you (1) acknowledge receipt of the merchandise, (2) agree to keep the merchandise in trust for the bank, and (3) promise to pay the bank as you sell the goods.

Chattel Mortgages

If you buy equipment such as a cash register or a delivery truck, you may want to get a chattel mortgage loan. You give the bank a lien on the equipment you are buying.

The bank also evaluates the present and future market value of the equipment being used to secure the loan. How rapidly will it depreciate? Does the borrower have the necessary fire, theft, property damage, and public liability insurance on the equipment? The banker has to be sure that the borrower protects the equipment.

Real Estate

Real estate is another form of collateral for long-term loans. When taking a real estate mortgage, the bank finds out: (1) the location of the real estate, (2) its physical condition, (3) its foreclosure value, and (4) the amount of insurance carried on the property.

Accounts Receivable

Many banks lend money on accounts receivable. In effect, you are counting on your customers to pay your note.

The bank may take accounts receivable on a notification or a non-notification plan. Under the notification plan, the purchaser of the goods is informed by the bank that his or her account has been assigned to it and he or she is asked to pay the bank. Under the non-notification plan, the borrower's customers continue to pay you the sums due on their accounts and you pay the bank.

Savings Accounts

Sometimes, you might get a loan by assigning to the bank a savings account. In such cases, the bank gets an assignment from you and keeps your passbook. If you assign an account in another bank as collateral, the lending bank asks the other bank to mark its records to show that the account is held as collateral.

Life Insurance

Another kind of collateral is life insurance. Banks will lend up to the cash value of a life insurance policy. You have to assign the policy to the bank.

If the policy is on the life of an executive of a small corporation, corporate resolutions must be made authorizing the assignment. Most insurance companies allow you to sign the policy back to the original beneficiary when the assignment to the bank ends.

Some people like to use life insurance as collateral rather than borrow directly from insurance companies. One reason is that a bank loan is often more convenient to obtain and usually may be obtained at a lower interest rate.

Stocks and Bonds

If you use stocks and bonds as collateral, they must be marketable. As a protection against market declines and possible expenses of liquidation, banks usually lend no more than 75 percent of the market value of high grade stock. On Federal Government or municipal bonds, they may be willing to lend 90 percent or more of their market value.

The bank may ask the borrower for additional security or payment whenever the market value of the stocks or bonds drops below the bank's required margin.

What Are the Lender's Rules for Getting Loans for Your Business?

Lending institutions are not interested in loan repayments. They are interested in borrowers with healthy profit-making businesses. Therefore, whether or not collateral is required for a loan, they set loan limitation and restrictions to protect themselves against unnecessary risks and at the same time against poor management practices by their borrowers. Often some owner-managers consider loan limitations a burden.

Yet others feel that such limitation also offer an opportunity for improving their management techniques.

Especially in making long-term loans, the borrower as well as the lender should be thinking of: (1) the net earning power of the borrowing company, (2) the capability of its management, (3) the long range prospects of the company, and (4) the long range prospects of the industry of which the company is a part. Such factors often mean that limitation increase as the duration of the loan increases.

What Kinds of Limitation?

The kinds of limitations, which an owner-manager finds set upon the company depends, to a great extent, on the company. If the company is a good risk, only minimum limitations need be set. A poor risk, of course, is different. Its limitation should be greater than those of a stronger company.

Look now for a few moments at the kinds of limitations and restrictions which the lender may set. Knowing what they are can help you see how they affect your operations.

The limitations which you will usually run into when you borrow money are:

(1) Repayment terms.

(2) Pledging or the use of security.

(3) Periodic reporting.

A loan agreement, as you may already know, is a tailor-made document covering, or referring to, all the terms and conditions of the loan. With it, the lender does two things: (1) protects position as a creditor (keeps that position in as protected a state as it was on the date the loan was made) and (2) assures repayment according to the terms.

The lender reasons that the borrower's business should generate enough funds to repay the loan while taking care of other needs. The lender considers that cash inflow should be great enough to do this without hurting the working capital of the borrower.

Covenants - Negative and Positive

The actual restrictions in a loan agreement come under a section known as covenants. Negative covenants are things which the borrower may not do without prior approval from the lender. Some examples are: further additions to the borrower's total debt, non pledge to others of the borrower's assets and issuance of dividends in excess of the terms of the loan agreement

On the other hand, positive covenants spell out things which the borrower must do. Some examples are: (1) maintenance of a minimum net working capital, (2) carrying of adequate insurance, (3) repaying the loan according to the terms of the agreement, and (4) supplying the lender with financial statements and reports.

Overall, however, loan agreements may be amended from time to time and exceptions made. Certain provisions may be waived from one year to the next with the consent of the lender.

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

Once you can show that you have carefully exercised your fiscal Requirements and can demonstrate experience and integrity, a
lending institution might be willing to finance part of your working requirements. This could possibly be done on a short term
basis of from 60 days to as much as one year. Any institution that has money to lend is mainly concerned with safety. The security
might be a business asset, but if you are just starting the best safety is usually your home or some other private advantage.

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

Be familiar with your banker. In picking a banker consider Progressiveness, mindset toward your business, credit services
provided, and the dimensions and management policies of the bank. Is your lender innovative? The physical look of this bank may
give you some indication. When the employees are pretty youthful, interested in your problems and active in civic affairs that the
bank is very likely to be progressive. The nature of the lender's advertising might also be an indicator for its progressiveness.

To succeed the banker Ought to Be interested in helping you to Become a better manager, and build a lasting relationship that will
mean rewarding business for you and the bank over the years.

Will the lender offer you the type of credit you want? For example, If seasonal accumulations of inventory become an issue will
the lender create a loan against public or field warehouse receipts? If your capital is tied up in accounts receivable during your
heavy selling year, will the bank take these receivables as security for a loan? Will the bank consider a term loan?

Finally, understand the dimensions and management policies of the bank. Will Your maximum conditions fall well inside the
bank's"legal limit"? If you intend to do some export company, does it have a currency department? In the event that you or your
traders sell on installment terms does the lender have facilities for handling installment paper? How profoundly is the bank
concerned with the rise and prosperity of the local community?

When you handle your banker, sell your self. Whether or not you Want a bank loan, also make it a practice to visit your banker at
least once a year. Openly discuss your plans and difficulties. It is the bank's business to not betray a confidence. If you need
financial aid carefully prepare, in written form, complete information that'll present a comprehensive comprehension of your
entire proposition. Many business-people or prospective small business operators ruin their chances of getting financial aid by
neglecting to present their proposition correctly.

Trade creditor or equipment maker, Companies from which you Buy equipment or product may also provide capital for you in the form
of extended credit. Manufacturers of store fixtures, cash registers, and industrial machinery frequently have funding plans under
which you may purchase in an installment basis and pay out of future income. You don't need to cover the goods simultaneously. If
goods are for resale, no safety aside from repossession rights of these unsold goods is involved. But too extended a use of credit
can prove expensive. Usually cash discounts are offered when a bill is paid within 10, 30, or 60 days. For instance, a duration of
sale offered as"2-10; net 30 days" signifies a cash discount of 2 percent will be awarded if the invoice is paid within 10 days.
If not paid in 10 days, the whole 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 each year. This is high interest. Prevent it.

One of the main causes of failures among businesses is Inadequate funding. Should you enter business, remember it's your
responsibility to provide, or obtain from others, adequate money to supply a firm foundation for your enterprise.

Sharing Ownership With Other People. Now that you have determined what Business to begin and how much capital will be required,
you may find it necessary to connect with a couple of associates to establish the enterprise.

If you lack specific management or technical skills which are of Major value to your preferred company a partner with these
abilities may prove a satisfactory way to pay the deficiency. If you are extremely proficient in your special area but lack
direction training and skills, you might search for a partner using a background in management. If you might need more startup
money, then sharing the ownership of this business is 1 way to obtain it. Great care ought to be taken in deciding upon a spouse.
Personality and character, in addition to capability to render financial or technical assistance, affect the achievement of a
pa333ship.

A partnership can be a mixed blessing. A partner who puts in time Or cash has got a right to expect a share in running the
business.

In a venture the accountability for the debts of the firm is Infinite, just as it's in one proprietorship. This means the owners
are Personally accountable for the firm's debts, even in excess of the sum that they Have spent in the organization. In a business
the accountability of the proprietor is Limited To the amount they pay for their shares of stock. A partnership, like one
proprietorship, lacks continuity. This means the Company terminates upon the Death of the proprietor or a partner, or on the
withdrawal of a spouse.