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Getting Accepted For A Small Business Loan

When starting a small business, one of the most important things to consider is financing. You will need enough money (or capital) to run your business until it begins to make a profit. One of the chief reasons that small businesses fail is lack of sufficient capital.

There are several ways to get enough capital to start and maintain a business but you first must decide just how much money you need. Do you need the money to expand or are you just beginning the business? Capital is especially critical in the beginning stages of a new business. Assess your risks, as that will affect your financing options and cost. Whether your industry is stable, growing or depressed it all affects how much money you can borrow and what interest rates you can get.

After assessing how much capital your business needs, you will decide whether you want equity or debt financing. Debt financing takes into account the company’s debt to equity ratio, the relation of the funds you have borrowed and those you have invested in the business. If you have invested a considerable amount into your business and have decent equity, it will be easier to attract financing. When a company has a less equity than debt, you’ll want to increase your equity investment for more funds so that you aren’t over-leveraged.

Banks, commercial finance companies, the U.S. Small Business Administration (SBA) and savings and loan companies offer debt financing. Historically, businesses have patronized banks for financing, especially for short-term loans. Banks will often turn down small businesses requesting long-term loans because of the risks involved. When a business applies for a loan, the lenders usually ask for the borrower’s personal guarantee as well as considering the business’s equity. This could require merely a signature or posting of collateral.

Most small businesses make use of equity financing. Commonly, the source of equity funding is from venture capitalists. These are institutions that risk money on small businesses, hoping for a good return for their investment. These venture capitalists may be individuals, government sources or financial concerns. One well-known example of capitalist investing is Silicon Valley.

Whether you decide on equity or debt financing, you will need to present a financial picture of your business. Any financial institution or investor will require documentation of your real or projected annual sales, how many people you employ, how long you have been in business, which type of business you have and who owns it.

You will need to put together financial statements for the past few years as well as current statements and submit personal financial statements of any partners, officers or stockholders that own twenty percent or more of the business. Any person or institution lending your business money will want to know exactly how the business will use the funds.

Lenders will scrutinize your financial statements carefully so the statements should be accurate and up-to-date. You will need balance sheets from the last three fiscal years, cash flow projections, personal tax returns for the past three years, income statements on the business’ profits or losses as well as accounts receivables and payables.

As you can see, it takes much careful preparation should you decide to apply for a loan. Your local SBA can be a tremendous resource in preparing for and applying for a small business loan.

You Can Buy a Business Without Bank Financing

People wishing to buy a business are often put off by concerns about financing. They don’t have the bucks to pay cash, SBA loans are no longer as available as water at their favorite restaurant, the banks aren’t too friendly in the lending department, the equity in their home has evaporated, and there no rich uncles around to bankroll their dream purchase.

Guess what? People who want to sell their businesses understand that. In fact, a good business broker will explain that very common buyer’s limitation upfront to his seller, before he even lists that business. The business broker will encourage the seller to offer terms-in short, to carry a note for part of the purchase.

And most of them will. I am a business broker in Las Vegas and the thumping majority of my listings have sellers willing to lug some paper on the back end of a sale.

The key to a successful deal is often the nature of the agreement–more particularly, the downpayment and the terms–rather than the selling price. Most people looking to buy a business want to get their downpayment back out of the first year’s profits. Conversely, most people selling their businesses want a downpayment large enough (often around 50%) that the buyer has sunk sufficient cash into the sale to insure that he will do everything possible to keep the business successful enough to pay off the balance. Most deals in which paper is carried accomplish that.

Let’s use an example. Say a service business does a gross of a $140K a year, with a net profit at around $70K. And the seller of the business wants $135K for it. Often the published terms (those stated by the seller in the listing) will go like this: $70K down, remaining over 24 months at 8% interest. Get it? The buyer of the business gets his downpayment back in profits that first year and can then spread out the balance for the next two years.

Read my lips: You don’t have to offer either the price or the terms the seller of the business requests. You maybe want to offer $120K for this enterprise, at $60K down and the rest over 36 months. All things being equal, it is likely a motivated buyer would accept that offer to buy her business.

But what if the buyer wants all cash? If the price is low-under $100k-it may not be much of a problem for most buyers. But even here, you will find business sellers willing to carry small notes.

Whatever you do when buying a business, do not be put off by an all-cash request. If that business has been perched on the listing system for awhile getting limited interest, the seller of the business may well swallow hard and accept a sale with terms.

Business buyers listen up: Don’t be put off by selling prices and fears over rustling up the money. That is not the place to start. First, find a business that you find attractive-financially and otherwise. Just look for something that catches your eye. Once you hit it, then look at price and terms. It may be affordable right there. In any case, if you have a broker of any value representing you, talk it over with him as frankly as you would present a matter to your lawyer. He may well be able to help you put together a reasonable offer. It might be conventional or even rather creative. It doesn’t matter. After perhaps a little dickering back and forth, you may get a deal.

And if you do, that’s all that matters. You have taken the first step toward realizing the dream of owning your own business.

Tips For Establishing Business Credit Fast

Borrowing from the SBA

Borrowing money is one of the most common sources of funding for a small business, but obtaining a loan isn’t always easy. Before you approach your banker for a loan, it is a good idea to understand as much as you can about the factors the bank will evaluate when they consider your loan. This discussion outlines some of the key factors a bank uses to analyze a potential borrower. Also included is a self-assessment checklist at the end of this section for you to complete.

Key Points to Consider

Some of the key points your banker will review:

1. Ability/Capacity to Repay

The ability to repay must be justified in your loan package. Banks want to see two sources of repayment – cash flow from the business, plus a secondary source such as collateral. In order to analyze the cash flow of the business, the lender will review the business past financial statements. Generally, banks feel most comfortable dealing with a business that has been in existence for a number of years, as they have a financial track record. If the business has consistently made a profit and that profit can cover the payment of additional debt, then it is likely the loan will be approved. If, however, the business has been operating marginally and now has a new opportunity to grow, or if that business is a startup, then it is necessary to prepare a thorough loan package with a detailed explanation addressing how the business will be able to repay the loan.

2. Credit History

One of the first things a bank will determine when a person/business requests a loan is whether their personal and business credit is good. Therefore, before you go to the bank or even start the process of preparing a loan request, make sure your credit is good

3. Equity

Financial institutions want to see a certain amount of equity in a business. Equity can be built up through retained earnings or the injection of cash from either the owner or investors. Most banks want to see that the total liabilities or debt of a business is not more than 4 times the amount of equity. (Or, stated differently, when you divide total liabilities by equity, your answer should not be more than 4.) Therefore, if you want a loan, you must ensure that there is enough equity in the company to leverage that loan.

Don’t be misled into thinking that startup businesses can obtain 100% financing through conventional or special loan programs. A business owner usually must put some of his/her own money into it. The amount an individual must put into the business in order to obtain a loan is dependent on the type of loan, purpose, and terms. For example, most banks want the owner to put in at least 20 – 40% of the total request.

Example: A new business needs a $100,000 to start. The business owner must put $20,000 of his/her own money into the new business as equity. His/Her loan will be $80,000. The debt to equity ratio is 4:1. Note that this is only one of many factors used to evaluate the business – simply having the right debt to equity ratio does not guarantee you’ll get the loan.

The balance sheet indicates the amount of equity or net worth of a business. The net worth of the business is often a combination of retained earnings and the owner’s equity. In many cases, an owner’s equity will be shown as a loan from shareholders, and is therefore a liability. If a business owner wishes to obtain a loan, he/she will be obligated to pay the bank back first, not his/herself. Consequently, it may be necessary to restructure the liability so that it becomes the owner’s equity, or subordinate the loan. If the current debt to net worth is 4 or over, it is unlikely that the business will be able to obtain additional debt/loan. Understand your financial statements.

Understanding Financial Statements:

The primary financial statements are represented in the balance sheet and income statement. Learn more about these statements

BALANCE SHEET

The balance sheet is a snapshot of the company’s financial standing at an instant in time. The balance sheet shows the company’s financial position, what it owns (assets) and what it owes (liabilities and net worth). The “bottom line” of a balance sheet must always balance (i.e. assets = liabilities + net worth). The individual elements of a balance sheet change from day to day and reflect the activities of the company. Analyzing how the balance sheet changes over time will reveal important information about the company’s business trends.

INCOME STATEMENT

Known also as the profit and loss statement, the income statement shows all income and expense accounts over a period of time. That is, it shows how profitable the business is. This financial statement shows what how much money the company will make after all expenses are accounted for. Remember that an income statement does not reveal hidden problems like insufficient cash flow problems. Income statements are read from top to bottom and represent earnings and expenses over a period of time.

4. Collateral

Financial institutions are looking for a second source of repayment, which is often collateral. Collateral are those personal and business assets that can be sold to pay back the loan. Every loan program, even many microloan programs, requires at least some collateral to secure a loan. If a potential borrower has no collateral, he/she will need a co-signer that has collateral to pledge. Otherwise, it may be difficult to obtain a loan.

The value of collateral is not based on market value; that is discounted to take into account the value that would be lost if the assets had to be liquidated.

5. Experience

A client who wants to open a business and has no experience in that business should not seek financing, let alone start the business unless they intend to hire people who know the business or take on a partner that has the appropriate experience. Regardless, the client should be advised to take some time to work in the business first and take some entrepreneurial training classes.
Sample Collateral Chart [http://www.corporatefasttrack.com/SBA_Collateral_Ratio.htm]

Questions Your Banker Will Ask

The key questions the banker will be seeking to answer are as follows:

  1. Can the business repay the loan? (Is cash flow greater than debt service?)
  2. Can you repay the loan if the business fails? (Is collateral sufficient to repay the loan?)
  3. Does the business collect its bills?
  4. Does the business control its inventory?
  5. Does the business pay its bills?
  6. Are the officers committed to the business?
  7. Does the business have a profitable operating history?
  8. Does the business match its sources and uses of funds?
  9. Are sales growing?
  10. Does the business control expenses?
  11. Are profits increasing as a percentage of sales?
  12. Is there any discretionary cash flow?
  13. What is the future of the industry?
  14. Who is your competition and what are their strengths and weaknesses ?