time to process, and take most or all of your business and personal assets (such as your home) as collateral.

Other types of small business loans.

Include lenders that will give you a loan at a slightly than higher market rate simply based on you having a lot of equity in your home. In such a case, it will be easier to just use your home and not involve yourself in all the other complications described above. Many people who are starting businesses don’t want to put up their home as security. This will limit your options. Looked at objectively, it is someone who doesn’t want to risk their home but wants a lender to lender to risk their capital on a new business. Often, this outlook not always realistic and won’t work. And surprisingly, the SBA will often take everything your business owns and also take your home as collateral anyway for small business loans. As a business owner you intend to grow your business and you may need additional small business loans for inventory, raw materials, expansion, relocation, partner buyouts, etc. within the next 5 years. If the SBA has all of your business assets and personal assets as collateral, you will be in an almost impossible position the next time your business needs a loan.

Another exception of a less than 2 Year old business getting a loan is if the business wants a lower amount of money, say $20,000 or less and the owner has strong personal credit. Some institutions will make such a loan on the basis that if you would have qualified for a personal loan for such an amount, why would they turn you down simply because it’s a business loan request? They will just make you personally guarantee it. For all intents and purposes it’s really a personal loan set up as a business loan.

Existing Businesses

It is difficult to get a business loan through traditional sources (Brick and Mortar Banks), even if you have a relationship with them.

Traditional sources have a very high decline rate for business loan requests and decline your request for many more reasons than non-traditional sources of capital. They will request financial statements, Tax Returns, have many questions along the way, and will greatly scrutinize your cash flow, assets and secondary sources of payment.

Once the bank has turned you down, all their talk about how much they “value your relationship”, doesn’t do you any good. What should you do? Know what’s important in securing a business loan.

WHAT'S IMPORTANT

The type of business you have, how long you have been in business, your company credit, your personal credit, and your collateral all play a major role in obtaining other types of capital.

Type of Business

Some lenders favor certain industries over others. Restaurants, Food Service, Bars, Vending Companies and other retail oriented business are not favored by institutions. They will take your application and will give you the same impression that you are as likely to get a loan with them as any other industry, but the reality is different. Many traditional lenders in general prefer Medical or Legal Professionals, large manufacturing companies or non-retail service companies.

Time in Business

In most cases, lenders want you to be in business for two years or more before they will even begin to consider you for a business loan.

Some want 3 to 5 years or more in business and 2 Years of profitable tax returns. The main reason is that a substantial number of businesses fail within the first 5 years. Another is that if you haven’t been in business for 2 years or more, you won’t have the tax returns or financial statements they need to look at your cash flow. In addition, it takes most companies two years or longer before they begin to show profits that will qualify them for loans.

Business Credit

When a business applies for a loan, the lender often will check to see if the business has a business credit file. The company most often used for this purpose is Dun & Bradstreet, although there are others such as CIT and Experian.

The primary things lenders look for in this report is to verify the starting date of the company, the high credit, and look for what is known as a “Paydex” score. This score is similar to the “bureau” score on the personal credit file.

Approvable Paydex scores begin at around 60, depending on other factors, such as amount of the request, type of request, personal credit, but most lenders like to see a Paydex Score of 70 or higher, preferably 75 or higher. The lender will also consider the high credit reflected on the report and see if there are any current past dues showing. Often, the reportings are outdated, so you should check to make sure your listings are current and accurate before you apply. You should first determine if you even have a business credit file.

If you do not have a business credit file, it is an advantage, sometimes critical for a business to have a strong business credit file. If you do not have a business credit file, you can establish one, but will have to pay a few hundred dollars for it. This is money well spent. The Credit agency will ask you to give them your creditor’s basic contact and account information. They will call to verify the information and report it on your file. Normally, this will take up to a month. A faster approach is for you to call your trade references and have them call the Business Credit Bureau(s) to report about the accounts you have with them. This will speed things up greatly.

The Business Credit agencies will give you a good idea about what kind of creditors they will list as business credit tradelines. It is sometimes different than personal credit trade lines.

Example:

Acme General Contracting buys concrete periodically from Concrete Central. The most they have ever bought or owed at one time was $30,000. This would be, along with timeliness of payments, the high credit Concrete Central would report to Dun & Bradstreet about Acme General Contracting.

Dun & Bradstreet will often even report accounts like Federal Express type on the file. They will mix them in by industry rather than itemizing them. Contact Dun & Bradstreet and other business credit agencies for details.

What will they look at?

If you are a large company with say $10MM in sales per year and you are seeking a $500,000 loan request, then be prepared to provide at least several years tax returns, accountant audited financial statements and 6 months bank statements for the credit review process. The more you ask for, the more that will be requested and the more it will be scrutinized.

Personal Credit

The credit reviewed in Business Loan requests is not limited to Business Credit. Your personal credit is reviewed and considered a majority of the time.

Many people believe when they apply for small business loans that because the request is in the name of the business, their personal credit won’t be or shouldn’t be looked at. No so. In most cases, personal credit will be reviewed and the owners(s) of the company will be asked to individually guarantee the loan.

The reason is that most companies are small companies and if the owner or president has a personal credit problem, there is a good chance it will affect the business, including checking accounts, business loans, etc. The larger a company is, the less likely a personal credit problem an owner is having will affect the company. The size of a company is usually determined by the Annual Sales and the number of employees.

If a company is a Sole Proprietorship or Partnership, the personal credit of the owners will always be reviewed, and the owners will always be required to sign as a guarantor. This is because the owners are not a separate legal entity from the company. They are the company. A corporation is legally a separate entity from the owners. The owners own stock in the corporation, but it can be a small percentage of the stock.

Generally, the only time the personal credit of an owner may not be reviewed and the owner not asked to be a signer on the loan is for corporations that have been incorporated for 3 years or longer with strong business credit. Otherwise, your personal credit will be reviewed as part of the decision.

Collateral

The type of collateral you have to offer when applying for small business loans is an important factor in determining if you will be approved.

You must qualify from a credit and cash flow standpoint before your collateral is considered. When you are at that point, the collateral can be a make or break issue.

Liquid Collateral such as Certificates of Deposit, Corporate Savings Accounts, Money Market Accounts are most preferred, especially by banks.
When banks suggest or ask for this type of collateral, many applicants state that if they had the amount of their request in cash, they wouldn’t need a business loan. This is true, but many businesses recognize that it can be dangerous for them to use most or all of their existing cash because if something comes up for which their business needs cash fast, their company can run into a problem. This is why some companies apply for loans even if they have the cash on hand. Very large companies commonly do this and use their cash on hand as needed for other things.

Some Banks are so conservative, they may decline your request even if you have a Certificate of Deposit in cash for the amount of your request. Their reasoning is that they want a high comfort level that you will pay the loan back from your cash flow. They do not want to have to cash in your collateral to repay the loan, so they don’t want to make small business loans to companies they feel will have trouble making the payments solely because the company has a certificate of deposit to cover the loan.

The owner of a company has the option of taking personal cash funds, converting them into a Business Certificate of Deposit, Business Savings Account, Business Money Market Account or Listed Stock, put it in the Business name and use it as collateral.

Real Estate, especially personal Real Estate such as a home with a lot of equity is one of the most favored types of collateral. Other than a Certificate of Deposit or Savings Account being held as collateral, lenders feel that they will most easily be able to recover their money in the event of a default with a home. A lender can sell a home more quickly and recover a greater percentage of the loan than with a commercial piece of property or other types of assets.

Lenders will take commercial pieces of property as collateral, but want to see more equity in commercial property than in personal property such as homes. Lenders know that it will take them longer to sell commercial property and they will have to offer a much greater discount from the appraised value if they want to sell it fast, which they need to do to recover their money in the event of a default.

Accounts Receivable will be valued as collateral depending on the quality of the companies that owe the money, the time on the receivables, and how many companies account for the total Accounts Receivable. The pay history of these accounts will also be looked at. How aggressively the company works to collect the accounts receivable on a timely basis is considered.

Equipment is not considered a primary or significant type of collateral by lenders. Equipment loses it value fairly rapidly and in the event of a default, if the lender decides to reposes the collateral, the lender will have to arrange for it to be picked up. It will often be sold by a third party vendor in the secondary market. The lender will recover a fraction of the outstanding loan and take a significant loss. For this reason, most lenders will over collateralize loans with equipment as by a significant margin, often 200% to 1000% of the current value.

Blanket Liens are liens that cover all business assets you own. Lenders will often try to take everything your business owns including personal assets such as your home as collateral for small business loans. As a business owner you intend to grow your business and you may need additional small business loans for things such as marketing expenses, expansion, raw materials, raw materials, relocation, etc. within the next 5 years. If the lender has all of your business assets and personal assets as collateral, you will be in a very difficult position the next time your business needs a loan.

STRATEGY

Your company needs $100,000. Most companies will go to one place and ask for $100,000. This is not always the best approach. . What if you would have qualified for $70,000 but not for $100,000? Tell the lender up front what you want, but if they cannot give that to you, what amount can they do, and under what conditions?

If the first lender can approve you, depending on what they want for collateral, it is wise to try to negotiate the collateral. If your company has $2MM worth of equipment, $1MM in Accounts receivable, Real Estate worth $2MM, and you are asking for $200,000, some institutions may try to take everything you own as collateral. This is when you should try to negotiate what they take as collateral.

Suggest up front what you want to offer as collateral. Simply put, if you give it to them, they will take it. You may end up having to provide all this collateral and institutions normally don’t negotiate this, but most people don’t try to negotiate this. They think if the bank asks for it, it is set in stone.

An example would be for you to negotiate and the lender agrees to take everything but the Accounts Receivable and equipment as collateral, or maybe the Equipment and Accounts Receivable but not the land. Lenders are not used to the borrower handling it this way, but you wont’ get it if you don’t ask for it.

Another major reason to do this is that traditional lenders will automatically take most everything you have as collateral. Suppose you are requesting a 6 year loan. If the bank takes all your assets as collateral, now have no collateral to offer should you need to borrow again in the next 6 years. Does the lender care about that? No, but you need to put great importance on that.

As the owner of the business, you intend to expand in the next several years. It is just as likely that due to expansion, need for inventory, raw materials, relocation, marketing programs, etc. that you will need capital again before the current loan is paid off. When that happens, all your assets will still be tied up in the original loan. You certainly won’t be able to get a totally unsecured loan at that time. Don’t count on previous lender to release part of your collateral just because you balance is a small fraction of the original amount. They rarely do.

If this does not work, another approach could be to get either the same amount of loan, but half from one lender and the other half from another lender. Or to get different types of small business loans from different lenders. All things equal at your company, it will be harder for you to get $150,000 from one lender than it will be to get $75,000 from two lenders. You could use the Accounts Receivable for one loan and the equipment for another. That could leave the land free for a future request.

Watch out!

Buying A Business

If you want to buy an existing business, financing can be difficult to obtain. You will be looked at as a new owner. There are options that make it easier to arrange this type of financing…….more

Asking the owner to Self Finance part of the sale is a creative option that many people overlook or don’t negotiate aggressively enough. Most people cannot get a small business loan to 100% cover the purchase, so ask the owner to finance a percentage of the purchase to you directly.

Being able to sell the business is the motivation the seller has to self finance a part of the business to you. The higher the percentage you ask the seller to finance themselves, the more motivation you need to give them to do so. Should you not make your payments on time, you can arrange for certain increasing penalties, the more delinquent the payments become. If you are more than 60 days Past due on your payments, you can increase the late fees. You can put in a clause that in event of a default, certain assets automatically become property of the seller.

Buyers typically do not want to arrange this type of financing, but if it is your goal to have that business, you must be willing to take aggressive risks in order to give the seller a compelling reason to accept less than 100% of what the business is worth.

Call Options

Some loans will have covenants or provisions that seem minor but can really cause problems later. Traditional lenders like to put clauses into their loans that allow them to “Call” the loan anytime.

This means that if they feel like it, they can call you anytime and demand you payoff the balance either immediately or within 30 days! This can be devastating to your business. Try to negotiate that out of your loan. Any one of a number of things could happen that are out of your control and the bank might call the loan. The economy could worsen. Maybe you were paying a little slow on your loan, and they had an upsurge in defaulted loans and they decided to call all but the best paying loans. It could be they urgently needed capital and to help themselves they call the loan. These things could happen! What would you do?

If you try to get it re-financed at another bank, the other bank will soon figure out that your bank is calling the loan, which they consider a negative, justified or not.

If you cannot get it re-financed, you are now wide open to that bank suing you, reposing your assets, selling them and then you are out of business. Avoid a call option being put in your loan.

Annual Payouts

Some lenders that approve you for a business line of credit will have a condition in the line of credit for you to pay the balance down to $0 once per year, regardless of how much you borrow, how well you pay.

This could be extremely difficult for you to do. If you fail to do so, the remaining conditions for failure to annually pay out could be severe. Depending on the loan contract, they may have the option to do any number of things from raising the rate to calling the loan.

Company Only or Corp only Loans

Some lenders will approve loans that are just in the name of the company, that is, no principal or signer is required to guarantee the loan. This only occurs with Corporations, and is most often considered for 5 Year or older corporations.

The idea behind these began with larger companies.

For example, if Coca-Cola takes out a $500 Million loan, none of the employees or officers of the company would consider individually guarantee these, otherwise the lender could come after them if the loan is in default and ruin them financially.

In such a loan, the loan is in the name of the company only, so if the company defaults, the lender can only liquidate the company assets in their efforts to partially repay the balance of the loan.

An Example of this was Eastern Air Lines. The lender actually sold the hard assets of the company to repay the loan as much as possible.

This is another reason to incorporate and work to establish business credit. Within a few years, you will then be considered for some types of small business loans and other types of capital in the company name only without having to individually guaranteeing every loan.

Another benefit is that any small business loans you do not guarantee will not show up on your personal credit report. If you are having to currently guarantee all business loans now, it is likely these loans are showing up on your personal credit report. This will cause you to to appear to be overextended when in fact the revenues from your business is being used to pay these loans rather than from your personal income. The more of these you personally guarantee, the harder it will be to get other personal loans or small business loans in the future since you appear to be making yourself more and more “debt heavy”, based on your personal credit bureau.