Tips on Scoring That Business Loan

by C.D. Moriarty

Starting a business is an exciting time. Your new venture promises to make your future happy and financially secure. Family and friends support your idea and their enthusiasm adds to the excitement. What do you do, though, if some of the cash for your dream business is missing? The first place a new business owner often heads is the local bank. Before you take that step, here are some financial basics to improve your chances of getting the money.

Applying for a business loan takes time, energy, and motivation. Most importantly, the application requires a new set of skills. First, be sure your personal financial details are in order. Although you may be asking for this money for your new business, the loan officers want to know that you qualify for this loan. The new business venture does not have a financial history for the bank to review. The analysis comes down to you.

The bank will determine your credit score based on your credit history - how timely you pay bills, how much debt is outstanding, and what other loans you have been responsible for in the past. You need to review your credit report before they do and correct any discrepancies. Luckily, acquiring a credit report is free and easy. There are three main credit reporting agencies: Transunion, Equifax, and Experian. Request a free credit report from each. You can do this by contacting them each individually or on the web at: www.annualcreditreport.com. Be sure the reports match your records and correct any information before you file a loan application.

The bank uses the five C's of credit to determine your responsibility for the loan: character, collateral, capital, capacity, and conditions. Know how these affect you before you fill out the loan application.

Character is your personal reputation and includes your credit history, along with your honesty, integrity, and professionalism. Collateral is tangible property you are willing to "put up or set aside" to get this loan. A loan guaranteed by your home would be much easier to get than a loan secured only by potential business earnings. The bank is looking for either personal or business property that has a guaranteed value to secure the loan.

Capital is the money you have to put into the business. If you are requesting $30,000 to start your business, but you are only putting in $1,000 of your own money, the bank would not look as favorably on you as if you put in $10,000 and requested a $30,000 loan.

Capacity is how much money you have the potential to make in the new business. The cash flow is as critical as the money that you will earn in the business. Your cash flow must consistently be able to meet the loan and interest repayments on a monthly basis. Capacity can be predicted through financial projections based on what you are expecting as revenue in the business and what you expect as expenses. The bank will want details on your business financial projections and plans.

Create a business plan before you make the loan request. Not only do bankers want to see this document, but it will prepare you to answer their questions. According to Daniel Stannard, Senior Vice President of Factory Point National Bank in Manchester, the plan needs to prove that your future finances will support the business, you and the loan repayments. The bank wants to know that you understand your business and that they can invest in your business.

Conditions addresses the state of the economy and the marketability of your service or product. The bankers take the bigger picture as well as your financial details into account when you apply for a loan.

Be realistic throughout the process: What are you asking for and why? Are you a good credit risk? Have you done your homework on this business? Do you have previous experience? Positive answers will make you look good to the potential lenders. Remember, for your first job out of college, you were organized, prepared for the interview questions and had credible references. This is the same type of process.

Whether your loan application is accepted or rejected, spend some time with the loan officer and ask questions. If the application leads to a loan agreement, you need to understand the structure of the loan - how much interest, when the payments are due, what if any are the early payoff penalties and how often the bank want to hear from you. Having a relationship with your banker will help the on-going process of operating a successful business. Remember, commercial loan interest rates are higher than personal rates because of the additional risk.

If you do not receive the loan, still spend time with the loan officer and ask why the application was it rejected. The bank will be a good source of referrals for additional sources of money and what you can do to improve your chances of securing a loan at another institution.

Small business owners I talk to emphasize that the time to ask for a loan is before you really need the cash for your business. Once your business is very low on cash, it is too late, not only because of the time lag between applying for and receiving the cash, but also because you will have a harder time convincing the bank that you are a viable candidate for a loan when your company is in trouble. Remember, bankers are in the business of giving loans to get money back, not of taking huge risks to make money.

Finally, have a Plan B for financing. If a bank or series of banks turn you down, be ready with options to create your business in a different way. You could delay the start of your business and save money for your startup. Or you could work full-time as you start your business to fund the income needed to keep the business going. Or find investors to help you fund the business. Like a bank, you will be accountable to investors except as part owners they will share the financial upsides and downsides of the company.

Another option is to find a business partner. Pooling your finances and talents will increase the likelihood of success. (Consult a lawyer to build a partnership agreement to protect you and your business.) You may find other forms of financing for your business, like taking loans from the company who sells you equipment and materials to get you started.

As an alternative to traditional bank loans, many businesses have started with credit card financing. We have heard stories in industries from high tech to retail of the success of credit card funding. What is much less publicized are the unsuccessful attempts funded this way. But if you can live with the high interest rates and the emotional burden of credit card debt as you begin your business, it is another option.

The Small Business Association (SBA) offers free services to help new business owners write business plans, get financing and receive free mentoring. Check out the local offices in your area to improve your chances of creating a long-term viable business.

Whatever route you chose, as you get your business going, remember: Your dream business is your future. Financing is one of the multifaceted elements of operating a business. Take your time, learn what you can and financing will be part of the education that takes you ahead in the business world.

C. D. Moriarty is a financial speaker, writer, and coach dedicated to empowering others around their money. Her financial wisdom and information is at www.moneypeace.com.