There are more than twenty-five million small businesses operating in the United States today; they employ fifty-eight percent of the country’s private work force and generate more than fifty percent of the nation’s gross domestic product.
Many of those twenty-five million businesses have been and continue to be successful in borrowing and repaying small business loans. A small business can be successful in obtaining loans by having the right numbers before going to the bank. However, loans to start a new business or expand an existing small business are often more difficult to obtain. The major reason for this relative difficulty is based on increased risk of a loan to a business as opposed to the relatively lower risk of home or car loans.
William C. Deegan, Sr. at bdeegan@westga.edu states five criteria that most lenders require from small business owners to meet in order to successfully acquire funds; they are – good credit, equity, experience, a business plan, and collateral.
1) Good Credit – Without question one must have a credit history which is not only good, but more to the outstanding side of the scale. Lenders have in recent years subscribed to a credit measuring system in which a generalized credit score is computed for each individual who has a recorded credit history; these scores range from the low end at 300 to the high end at 850. Observation of past successful lending has shown that the credit score needs to be at or above 700 for consideration of having good credit.
2) Equity – Equity in borrowing can be thought of as similar to a down payment; the lender will want the business owner to have some “skin” in the game. The numeric value of required owner equity will be in the 20 percent range.
3) Experience – No rational lender will turn over money to a borrower to manage a business in which the person has no or very limited experience. Here again the question is risk. At the minimum, the borrower should have at least three years of experience in the management of the type of business.
4) Business Plan – The lender will require a well-thought out business plan in writing. Include the following: describe the business, the potential market, the existing competition, who will be employed, who will lead and manage, and how the borrowed funds will be used. The business plan should also include pro-forma (future estimates) financial documents, including cash flow statements, income statements, and a balance sheet. A positive cash flow is mandatory.
5) Collateral – Collateral is any asset of value that can be pledged by the borrower as security that the loan will be re-paid in full with interest. Collateral requirements in the process of borrowing for a business will range 20 to 50 percent above the loan amount. Collateral assets can be in the form of real property owned, inventory of the business, accounts receivable, cash savings or cash equivalent investments.
Make an appointment with a loan officer and request enough time to do a short presentation, with visual aids based on your business plan. Be professional, concise, and well organized.
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