Bank Loans

Bank Loan

Generally, banks will not lend money unsecured. Unless you have collateral for a loan, you probably won’t succeed with a bank.

However, if you are purchasing inventory, receivables, or real estate for the business, you can approach the bank with the idea that even if they don’t want to fund your purchase, they may be willing to fund your cash flow or working capital.

Remember: After you have spent your money buying the business, you still need cash to run the business for payroll, suppliers, rent, etc. If you have receivables, you will need cash to fund your receivables. The bank may be interested in this, and it will put you a step closer to raising the money.

Banks will try to grab all the collateral possible. It is not unusual for a bank to try to collateralize a loan with assets two to three times the loan amount (e.g., a $200,000 loan with $600,000 in collateral). Say NO. Banks are in business to make loans. The collateral should be reasonable and fair. Remember, if you need more money, you will not be able to use assets if they are locked up.

No matter where you get the money, the loan documents may contain restrictions on what money you can borrow from other sources. These restrictions can kill you if you have a problem, because a violation usually renders the loan due and payable. Make sure you understand these restrictions; don’t accept them if they are too rigid.

When approaching a bank, go to the right person. Talk to the person in the commercial loan group who has sufficient authority to grant you the loan amount you want. Ask about the bank’s guidelines and policies, and don’t try to apply for a type of bank loan they don’t offer. If they don’t factor receivables, what makes you think they will do it for you?

List real property and other assets to be held as collateral. Few financial institutions will provide non-collateral-based loans. All loans should have at least two identifiable sources of repayment: the first source is usually cash flow generated from profitable operations of the business, and the second source is collateral pledged to secure the loan.

Other documents you should submit along with the Business Plan and loan application:

    Lease (copies of proposal)

    Franchise Agreement

    Purchase Agreement

    Articles of Incorporation

    Plans and Specifications

    Copies of Licenses

    Letters of Reference

    Letters of Intent

    Contracts

    Partnership Agreement

When a bank lends money, it wants to ensure that it will be paid back. The bank must consider the following each time it makes a loan: 

Capacity to repay is the most critical of the five factors. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history on existing credit relationships—personal and commercial—is considered an indicator of future payment performance. Prospective lenders will also want to know about your contingent sources of repayment.

Capital is the money you personally have invested in the business and is an indication of how much you will lose should the business fail. Prospective lenders and investors will expect you to contribute your own assets and to undertake personal financial risk to establish the business before asking them to commit any funding. If you have a significant personal investment in the business, you are more likely to do everything in your power to make the business successful.

Collateral or guarantees are additional forms of security you can provide the lender. If the business cannot repay its loan, the bank wants to know there is a second source of repayment. Assets such as equipment, buildings, accounts receivable, and in some cases inventory are considered possible sources of repayment if they are sold by the bank for cash. Both business and personal assets can be sources of collateral for a loan. A guarantee, on the other hand, is just that—someone else signs a guarantee document promising to repay the loan if you can't. Some lenders may require such a guarantee in addition to collateral as security for a loan.

Conditions focus on the intended purpose of the bank loan. Will the money be used for working capital, additional equipment, or inventory? The lender will also consider the local economic climate and conditions both within your industry and in other industries that could affect your business.

Character is the personal impression you make on the potential lender or investor. The lender decides subjectively whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company. Your educational background and experience in business and in your industry will be reviewed. The quality of your references and the background and experience of your employees will also be considered.

Credit

Be practical; be realistic; be honest. The quickest way to lose your credibility is to exaggerate or be overly optimistic. Once you lose your credibility, the answer will be NO.

                                       < << Prev      Next >>>