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 ?

Business Letters – The Different Types of Business Letters

All business letters are written to make something happen. They either inform or seek information or action. A business letter that doesn’t seek action is a non-letter and should never have been written.

This article discusses the main types of business letters and their purposes:

Letters of Transmission

These letters, also called “cover” letters accompany something that is being sent to someone and explain why and from whom the item is being sent. For example, when a company’s annual report is distributed, it is usually accompanied by a letter of transmission highlighting several key points in the report and informing recipients that the report is enclosed or attached.

Letters that Inform

As the title suggests, these letters are intended to inform recipients about something. If you have a mortgage, you may have received a letter from your financial institution advising you that your interest rate has increased. This is a common example of a letter that informs.

Requests and Responses to Requests

Businesses write to individuals or businesses requesting a variety of things or events. These letters of request are usually responded to with letters of response.

Letters of Offer and Acceptance

When a person applies for a job and is successful, he or she usually receives a letter of offer outlining the terms and conditions of the job. Letters of Offer are also used for contracts. When a person accepts an offer, a letter of acceptance is used.

Sales Letters

Everyone knows what a sales letter is, they need no explanation. If you are like me, you receive far too many of them.

Condolence Letters

These aren’t common, but occasionally businesses send letters of condolence to spouses of employees who die, whose family members die, or who otherwise run into a sad or difficult time in their lives.

Conclusion

The interesting thing about letters is that each has a different way of being written depending on it’s purpose. All should have the three common elements; an opening paragraph explaining what the letter is about, the body with full details, and an action ending asking for something to happen.

When I receive a letter written by someone who has completed a business communication course, I can tell within seconds. Most of the other letters I receive are mediocre at best or poor at worst.

If you are in the business of writing business letters, reports or other documents and haven’t studied business communication, I strongly suggest you enrol at the earliest or at least read some of the other articles I have written about business communication.

3 Steps to Managing Your Business Credit For the Small Business Owner

As small business owners, many entrepreneurs may find it difficult to establish business credit and often have to rely on their personal credit history to get their business up and running. As soon as you decide to go forward with your business, there are a few steps you can take to start developing your business credit profile, which can help you negotiate better rates when financing with your vendors and suppliers.

1. First, if you have been operating for awhile, determine if you have a business credit profile. Check with D & B (Dun & Bradstreet) to see if they have an online file for your business. D & B is the leader in business credit reporting. If you do have a file available, review all the information to be certain it is accurate, just as you would your personal credit report. If they don’t have a file for your business, request a DUNS number and start building your business profile.

2. Add to your business credit profile by establishing your business checking account at a financial institution that understands the needs of small business owners. Compare rates and fees for maintaining accounts with the services that best suit your needs. Fees for simple actions such as the number of checks written or amount of cash deposited per month can vary from bank to bank and ultimately impact your bottom line. Look into whether you qualify for membership with a local credit union; they often have lower rates on many widely available services. Establish your utility services in your business name and pay for those services with your business checking account.

3. Be sure to pay your bills, especially your rent/mortgage on time. Your credit rating is determined by many factors, but paying bills on time is one of the top factors. Also, don’t over extend yourself with credit and keep your debt to cash ratio in mind. Also, get to know the credit history of your customers so you won’t jeopardize paying your bills on time because of slow paying customers.

Starting with these few simple steps can help you better manage your credit, which may affect your interest rates on everything from business lines of credit, equipment leasing, insurance premiums and even merchant cash advances. Invest some time in understanding what your credit is saying about your ability to do business, today and for many years to come.