Financing Overview

When a lender analyzes a business loan application they look at the 8 C's of lending:

Credit - It must be good.
Collateral - Something of value to secure the loan.
Cash Flow - Ability of the business to repay the loan from operations.
Capacity - Your personal ability to repay the loan.
Capital - Your cash investment or down payment.
Character - You!
Conditions - Anything that can affect your business (industry, economy, etc.)
Commitments - Your will to succeed.

1. You will need good credit. If there are any problems on the report that can be remedied before meeting with a banker, do so. A lender may be able to make exceptions if you can document that a negative report was due to circumstances beyond your control. Include a detailed written explanation with supporting information in your financing proposal. However, if the report shows that you are irresponsible and you have not demonstrated a willingness to repay obligations, the lender will be unable to make a loan.

2. There is no such thing as 100% financing. You are going to have to put some money into the business and the more the better.

3. A bank will require you to personally guarantee the loan even if you are incorporated. There is no way to avoid putting personal collateral at risk. If necessary this could include your house.

4. Some businesses are easier to finance than others are. Since over 60% of all small business start-ups fail within 5 years, lenders know that the odds are against a new business being around long enough to repay a loan. An existing business is easier to finance if profits are sufficient to repay the loan. Also, many sellers are willing to hold some of the financing. Franchises are generally easier to finance than independent start-up businesses.

5. The process is not quick. If you must have the money to open by a certain date, make your loan application as far in advance as possible.

6. THERE IS NO SUCH THING AS A GRANT OR FREE MONEY. We have never heard about anyone - anywhere - who got free money from the government to open any type of for-profit business. Grant money is typically available only to NON PROFIT ORGANZATIONS.

7. The Small Business Administration does not lend money. The SBA does have a guaranty program that is designed to provide more security to lenders so that they will lend money to small ventures which would be too risky for a regular bank loan. SBA guaranteed loans are made and processed by a bank, with the SBA guaranteeing up to 85 percent of the loan. Interest rates and repayment terms are negotiated between you and the lending institution. SBA does limit the interest rate the lender can charge and there is a small guaranty fee. Contact a business counselor at the GRSBDC for additional information on SBA programs.

When looking for financing there are many questions to be asked and answered. Keeping in the mind the above facts here are some questions that you should consider before you begin looking for a loan.

Do you have a good personal credit history? Yes No
A good personal credit history is one of the most important factors in identifying borrowers who will repay their commercial loans. Many loan programs require perfect personal credit in order to qualify. If you have had a bankruptcy in the past 10 years, or have slow payments, collections, or judgments, it may be difficult to obtain financing at this time. If a poor credit history can be explained by a particular incident, supply information on the situation and how you attempted to repair the past credit problem. If you have had a consistent credit problem, you will need to "repair" your credit history. Contact a credit and debt counseling service for assistance.

Have you filed and paid your personal and business income taxes? Yes No
Lenders and government loan programs require an individual and small business to have met their tax obligations for both filing and paying taxes. For SBA guaranteed loans, a tax verification of business income tax returns is obtained from the IRS before a loan is closed.

Can you demonstrate your business has the ability to repay a loan? Yes No
It is very important you provide sufficient data on comparable businesses and/or industry statistics to justify your revenue and expense projections. This is a primary part of your business plan. Training sessions and individual counseling can assist you in preparation of your business plan.

Does your business have a positive net worth? Yes No
The net worth for existing businesses should be positive. If there are loans from shareholders on the balance sheet and you are able to place the loans on "standby" (not pay the shareholders) while you repay the proposed bank loan, you may consider those loans from shareholders as equity.

Do you have enough capital to start a business? Yes No
All SBA loan programs require business owners provide equity for the business. The equity contribution by the owner is an indication of confidence in the business, it’s future growth and profitability. Some SBA loans require only a 10% capital injection, while others require 20-30% and in some cases more.

Do you have collateral to secure a business loan? Yes No
Business and personal assets can be considered collateral. The SBA will consider a secondary source of repayment, in some cases. For collateral purposes most assets are valued at less than face value. The value of assets for collateral purposes depends on the type of asset. Although the SBA loan program guidelines state collateral can not be the only factor leading to a denial, many banking policies state that loans must be 100% secured by available collateral. A refusal to provide collateral, if deemed necessary, will cause the loan to be declined.

Are you willing to personally guarantee a loan? Yes No
All owners of 20% or more of the business are asked to provide a personal guarantee in order to obtain an SBA guaranteed loan.

Do you have experience in running your own business? Yes No
For a new business, it is important the business owner demonstrate he/she has industry and/or entrepreneurial experience. If you have never owned or operated a small business, we again, strongly recommend you attend one or more of the GRSBDC's entrepreneurial training classes.