Are you thinking about starting a business but have no money to do it with? Well, you're not alone. This article will tell you the basics of borrowing money.
A loan is money that is borrowed, and has to be paid back along with interest. If the money is borrowed from an institution such as a bank, this is called a commercial loan. Money that is borrowed from a friend or a relative is called a personal loan.
The borrower, or debtor, is the business or individual that takes out the loan. The lender, or creditor, is the source from which the money was borrowed. The term, or period, is the time that is specified during which the borrower has to use the money borrowed before he has to repay the loan. The maturity of a loan is when a loan term reaches its end. The Principal is the amount that is borrowed from the lender. When you or your business borrows money, the lender wants to know when they will get their money back. Keep this in mind when you are looking for a lending source.
If the business is not able to repay the loan, the lending source has a right to legally come after assets to recoup it's money. The extent to which you are personally liable depends on the business structure your business is operating under.
If you are approved for a loan, that you will have to make scheduled payments (typically on monthly basis) plus interest. A loan can sometimes be set up as a balloon loan. A balloon loan will typically require smaller initial payments and one lump sum of what was borrowed as the final payment at the end of the term.
Borrowing from Institutions
Business loans generally fall into two main categories: short term and long term loans. A short term loan is a loan that is to be payed back within one year. Examples of short term loans include:
Working capital loans
Accounts receivable loans
Lines of credit
Long term loans are loans that are to be payed back typically from one to seven years. Long term loans are typically used for:
an expansion of a business
the purchase of equipment
real estate
Most business loans that are used for starting a business are long term loans.
When you approach an institution for a business loan, it will be looking at you as the business owner as closely as it will be looking at the business itself. One of the ways lending institutions make money is by lending money and they want to be as sure as possible that they get back their money with the interest owed.
The time between applying for a loan and learning that you have been approved (or disapproved) can vary. If you are disapproved, you may be told almost instantly. If you are approved, it may take a few days though it usually takes longer. It may even take several months to learn whether you or your business has being approved for the loan.
Borrowing from Family and Friends
If you don't want to, or can't get a commercial loan, you can consider getting a private loan from family or friends. This is usually real informal. However, you need to be careful because this can lead to ruined relationships.
If you are getting a private loan, it is in the best interest of the lender to have an agreement put in writing. The written agreement should state the principal, the interest charged and the terms of repayment. This puts the lender in better position either write off the loan on his or her tax return or to legally come after you.
You are free to reprint this only if the article text link is included:
If You are Starting a Business visit www.AGuideToStartingABusiness.com
Jose Valdez is the owner/operator of www.AGuideToStartingABusiness.com and www.AllHomeBasedBusinessIdeas.com
Monday, 26 December 2011
Getting a Small Business Loan 2012
Are you in need of financial resources in order to start or even maintain your small business? Most of us are. The fist step is to take a look at the vast number of commercial loan sources that offer help in this area such as Chase, Citibank, etc. Also, with the Small Business Administration (SBA), you should be able to arrange a connection with one of these banks. This is one of many organizations that specialize in loans to small businesses.
Contrary to the belief that bankers actually look for reasons to turn down prospective clients in need of a loan, they are in the business to lend money. This means that every time a banker is sitting in front of a potential client, they are hoping to make the deal work just as much, if not more than the client wants it to work.
A bank's primary role in the small business lending area is funding growth. An example of this would be to finance the expansion of small business with a proven track record. Most banks can offer a wide variety of loan packages designed to finance expansion of an already existing small business.
Below are a few examples bank loan packages :
1. Asset Based Financing. Asset Based Financing is a general term describing a transaction whereby a lender accepts collateral and assets of a company in exchange for a loan. Most asset based loans are collateral against other accounts receivable, inventory, or equipment. Accounts receivable is the most favored of the three because it can be converted into cash quickly. Banks will only advance funds on a percentage of receivable or inventory, typically being around 75% of the receivable and 50% inventory.
2. Line of Credit. A line of credit involves the bank's setting aside designated funds for the business to draw against for the cash it needs. As the line of credit is used, the credit line is reduced and when payments are made the line is replenished. One major advantage of a line of credit is that no interest is accrued unless the funds are actually used.
3. Floor Planning. Floor Planning is another form of asset based lending in which the borrower's inventory is used as collateral for the loan. Car dealerships are a prime example of a business that often uses floor planning as their primary financial tool.
Contrary to the belief that bankers actually look for reasons to turn down prospective clients in need of a loan, they are in the business to lend money. This means that every time a banker is sitting in front of a potential client, they are hoping to make the deal work just as much, if not more than the client wants it to work.
A bank's primary role in the small business lending area is funding growth. An example of this would be to finance the expansion of small business with a proven track record. Most banks can offer a wide variety of loan packages designed to finance expansion of an already existing small business.
Below are a few examples bank loan packages :
1. Asset Based Financing. Asset Based Financing is a general term describing a transaction whereby a lender accepts collateral and assets of a company in exchange for a loan. Most asset based loans are collateral against other accounts receivable, inventory, or equipment. Accounts receivable is the most favored of the three because it can be converted into cash quickly. Banks will only advance funds on a percentage of receivable or inventory, typically being around 75% of the receivable and 50% inventory.
2. Line of Credit. A line of credit involves the bank's setting aside designated funds for the business to draw against for the cash it needs. As the line of credit is used, the credit line is reduced and when payments are made the line is replenished. One major advantage of a line of credit is that no interest is accrued unless the funds are actually used.
3. Floor Planning. Floor Planning is another form of asset based lending in which the borrower's inventory is used as collateral for the loan. Car dealerships are a prime example of a business that often uses floor planning as their primary financial tool.
Factoring Financing: How to grow your business without debt or loans
What is factoring?
Accounts receivable financing, also known as factoring, is a powerful financial tool that has fueled the growth and success of a number of companies.
Factoring enables companies to capitalize on their unpaid receivables by selling them to a factoring company for immediate payment. With factoring, companies
immediately get paid for their invoiced work from the factoring finance company, while the factoring company waits to be paid by the customers. Factoring
strengthens a business' cash position by shortening the time to get invoices paid to 48 hours and providing the needed funds to meet current expenses and
target new opportunities.
Factoring Benefits
As opposed to loans and lines of credit that require that the client have tangible assets and strong financials, factoring relies more heavily on the
financial strength of the clients' customer. This is a critical feature,since many new and small businesses do not meet the financial criteria of traditional
lending institutions. However, many small businesses have a roster of financially strong customers that can be leveraged. Factoring empowers businesses to
capitalize on their customer list, and provides them with a tool to transform outstanding receivables into immediate cash, without generating debt. Since
Factoring is not a loan, it is an ideal financial product for the following:
o New and emerging businesses including small and home businesses, consultants and solo-preneurs.
o Businesses with financially strong customers
o Businesses that are preparing to grow significantly
o Business with intangible assets (e.g. consultants)
o Businesses that do not want to take a loan
An additional benefit of factoring is that the factor usually assumes part of the clients' credit risk for the customer. This means that if the customer
becomes financially insolvent due to bankruptcy and does not pay the invoice, the factor will assume the loss. This is a critical service for small companies
who may not be able to afford the bankruptcy of a customer.
Costs
The costs of a factoring transaction - also known as the discount - vary based on a number of variables such as the financial strength of the customer and
the amount being factored. Generally, the discount is a percentage of the invoice's face value that increases with time until the invoice gets paid. Small
businesses, those that have between $20,000 and $300,000 in yearly revenues, can expect to pay a discount rate of about 2% for every ten (10) days that the
invoice remains unpaid. Businesses with factorable revenues in excess of $300,000 can expect lower discount rates.
Factoring at Work: Business Services and Products, Inc. Case Study
Business Services and Products, Inc. (BSP, Inc.) is a small fictional company, which provides business consulting and equipment to local companies. It has
$300,000 of annual revenues and during the past year BSP Inc. has enjoyed significant sales growth. Although most business owners would be very happy to
manage such a company, Jane Sullivan, BSP Inc's president, is very worried about her company's financial position.
Most of BSP Inc.'s customers are large companies with a good reputation for always paying their invoices. However they always take between 30 to 45 days to
pay them. BSP Inc., however, needs to pay their employees every two weeks and their vendors every four weeks. This discrepancy between the time that
customers pay their bills and the time BSP Inc. needs to pay their employees and vendors has created cash flow problems in the past. Furthermore, these cash
flow problems have already caused Jane to delay payroll twice this year and have placed her trade (vendor) credit in jeopardy multiple times. This has also
caused her to pass on a number of significant business opportunities because she was unsure of the company's financial ability to hire and pay for additional
staffers. Unfortunately, BSP Inc. did not have a large enough financial cushion in the bank to afford paying employees while waiting for 45 days new clients
to pay their invoices.
The following table provides an overview of BSP, Inc's current financial position.
Business Services and Products, Inc (without financing)
Yearly sales: $300,000
Lost new sales opportunities: Unknown
Total Sales: $300,000
Variable Costs (60% of Sales): $180,000
Fixed Costs (Rent, phones, etc): $20,000
Total Costs: $200,000
Profit (Sales - Costs): $100,000
Although the company's prospects appear great, Jane may have to stall her company's growth until she builds a large enough cash cushion at the bank to
finance her company's growth. After careful consideration, Jane decided that a factoring line of working capital could help strengthen her company's
financial position. Furthermore, factoring her invoices would enable BSP Inc. to take on new customers and continue growing, knowing that she could
capitalize on her slow paying customers. BSP Inc.'s financing agreement will provide the company with an advance of 70% of her invoiced services. This means
that the company can get 70% of the face value of the factored invoices within 24 to 48 hours of submitting them to the factor. The remaining 30% of the
funds, less the factoring fees, will be quickly rebated as soon as the customer pays their invoice.This line of working capital strengthened the company's
financial position and bank account, enabling Jane to pay for new employees to service new contracts. Jane also decided to use the extra capital to pay her
vendors early, obtaining quick payment discounts and helping to reduce the cost of factoring.
BSP Inc. customers pay their invoices within 30 days of receipt. The discount (factoring fee) for these invoices is 6%. Every time an invoice is paid, the
factor rebates BSP Inc. the remaining 30% that was not advanced less the factoring fee. This means that once the transaction is completed, the factor rebates
24% (30% - 6%) to BSP Inc. Thanks to the factoring line of working capital, Jane was also to secure an additional $120,000 worth of business, bringing her
annual revenues to $420,000.
The following table shows BSP Inc.'s financial position a year after using factoring.
Business Services and Products (with factoring)
Existing Sales: $300,000
New Sales: $120,000 (factored)
Total Sales: $420,000
Variable Costs (60% of Sales): $252,000
Fixed Costs (Rent, phones, etc.): $20,000
Cost of Factoring (6% of $120,000): $7,200
Total Costs: $279,200
Net Profit (Sales - Costs): $140,800
As can be seen from the above table, factoring helped BSP Inc. increase profits substantially from $100,000 to $140,800 - a 40% increase. It placed BSP Inc.
on a more stable financial footing, priming it for growth. Furthermore, the cost impact of factoring on the bottom line was minimal, as it was easily
absorbed by the additional business, showing that factoring was paid for directly by the growth.
Accounts receivable financing, also known as factoring, is a powerful financial tool that has fueled the growth and success of a number of companies.
Factoring enables companies to capitalize on their unpaid receivables by selling them to a factoring company for immediate payment. With factoring, companies
immediately get paid for their invoiced work from the factoring finance company, while the factoring company waits to be paid by the customers. Factoring
strengthens a business' cash position by shortening the time to get invoices paid to 48 hours and providing the needed funds to meet current expenses and
target new opportunities.
Factoring Benefits
As opposed to loans and lines of credit that require that the client have tangible assets and strong financials, factoring relies more heavily on the
financial strength of the clients' customer. This is a critical feature,since many new and small businesses do not meet the financial criteria of traditional
lending institutions. However, many small businesses have a roster of financially strong customers that can be leveraged. Factoring empowers businesses to
capitalize on their customer list, and provides them with a tool to transform outstanding receivables into immediate cash, without generating debt. Since
Factoring is not a loan, it is an ideal financial product for the following:
o New and emerging businesses including small and home businesses, consultants and solo-preneurs.
o Businesses with financially strong customers
o Businesses that are preparing to grow significantly
o Business with intangible assets (e.g. consultants)
o Businesses that do not want to take a loan
An additional benefit of factoring is that the factor usually assumes part of the clients' credit risk for the customer. This means that if the customer
becomes financially insolvent due to bankruptcy and does not pay the invoice, the factor will assume the loss. This is a critical service for small companies
who may not be able to afford the bankruptcy of a customer.
Costs
The costs of a factoring transaction - also known as the discount - vary based on a number of variables such as the financial strength of the customer and
the amount being factored. Generally, the discount is a percentage of the invoice's face value that increases with time until the invoice gets paid. Small
businesses, those that have between $20,000 and $300,000 in yearly revenues, can expect to pay a discount rate of about 2% for every ten (10) days that the
invoice remains unpaid. Businesses with factorable revenues in excess of $300,000 can expect lower discount rates.
Factoring at Work: Business Services and Products, Inc. Case Study
Business Services and Products, Inc. (BSP, Inc.) is a small fictional company, which provides business consulting and equipment to local companies. It has
$300,000 of annual revenues and during the past year BSP Inc. has enjoyed significant sales growth. Although most business owners would be very happy to
manage such a company, Jane Sullivan, BSP Inc's president, is very worried about her company's financial position.
Most of BSP Inc.'s customers are large companies with a good reputation for always paying their invoices. However they always take between 30 to 45 days to
pay them. BSP Inc., however, needs to pay their employees every two weeks and their vendors every four weeks. This discrepancy between the time that
customers pay their bills and the time BSP Inc. needs to pay their employees and vendors has created cash flow problems in the past. Furthermore, these cash
flow problems have already caused Jane to delay payroll twice this year and have placed her trade (vendor) credit in jeopardy multiple times. This has also
caused her to pass on a number of significant business opportunities because she was unsure of the company's financial ability to hire and pay for additional
staffers. Unfortunately, BSP Inc. did not have a large enough financial cushion in the bank to afford paying employees while waiting for 45 days new clients
to pay their invoices.
The following table provides an overview of BSP, Inc's current financial position.
Business Services and Products, Inc (without financing)
Yearly sales: $300,000
Lost new sales opportunities: Unknown
Total Sales: $300,000
Variable Costs (60% of Sales): $180,000
Fixed Costs (Rent, phones, etc): $20,000
Total Costs: $200,000
Profit (Sales - Costs): $100,000
Although the company's prospects appear great, Jane may have to stall her company's growth until she builds a large enough cash cushion at the bank to
finance her company's growth. After careful consideration, Jane decided that a factoring line of working capital could help strengthen her company's
financial position. Furthermore, factoring her invoices would enable BSP Inc. to take on new customers and continue growing, knowing that she could
capitalize on her slow paying customers. BSP Inc.'s financing agreement will provide the company with an advance of 70% of her invoiced services. This means
that the company can get 70% of the face value of the factored invoices within 24 to 48 hours of submitting them to the factor. The remaining 30% of the
funds, less the factoring fees, will be quickly rebated as soon as the customer pays their invoice.This line of working capital strengthened the company's
financial position and bank account, enabling Jane to pay for new employees to service new contracts. Jane also decided to use the extra capital to pay her
vendors early, obtaining quick payment discounts and helping to reduce the cost of factoring.
BSP Inc. customers pay their invoices within 30 days of receipt. The discount (factoring fee) for these invoices is 6%. Every time an invoice is paid, the
factor rebates BSP Inc. the remaining 30% that was not advanced less the factoring fee. This means that once the transaction is completed, the factor rebates
24% (30% - 6%) to BSP Inc. Thanks to the factoring line of working capital, Jane was also to secure an additional $120,000 worth of business, bringing her
annual revenues to $420,000.
The following table shows BSP Inc.'s financial position a year after using factoring.
Business Services and Products (with factoring)
Existing Sales: $300,000
New Sales: $120,000 (factored)
Total Sales: $420,000
Variable Costs (60% of Sales): $252,000
Fixed Costs (Rent, phones, etc.): $20,000
Cost of Factoring (6% of $120,000): $7,200
Total Costs: $279,200
Net Profit (Sales - Costs): $140,800
As can be seen from the above table, factoring helped BSP Inc. increase profits substantially from $100,000 to $140,800 - a 40% increase. It placed BSP Inc.
on a more stable financial footing, priming it for growth. Furthermore, the cost impact of factoring on the bottom line was minimal, as it was easily
absorbed by the additional business, showing that factoring was paid for directly by the growth.
Create Real Magic And New Customers 2012
Do you want a small business opportunity that could create more business for you? It is a chance to sell to the government. Bring in new customers is always the number one goal of many business owners. It is the life blood of any operation and if you want your business to stay healthy then you must bring in fresh new customers and keep them coming back with a great service or product.
I would like to introduce you to the 59.005 Business Development Assistance to Small Business program.
This program is excellent for bringing in new business and revenue. Get help from this program to sell to the government. They will assist your small business in obtaining a "fair" share of contracts and subcontracts for Federal government supplies and services and a "fair" share of property sold by the government.
What an excellent opportunity this is! I would rather sell a lot more to meet my goals than to have to get a small business loans or small business grants.
What they can do for your company is:
(Restriction of bidding/award to small business only)
(1) Your application will set-aside the chance to increase the Federal procurement and disposal requirements awarded to small business for a great small business opportunity;
(2) You will receive consultation with procuring activities on structuring of procurement and sales planning to optimize small business participation;
(3) They will also review and analyze you small business capacity, credit, integrity, perseverance, and tenacity when challenged by contracting officers and certifying competence of such firms to perform as prime contractors, as appropriate, and monitoring performance of certificate of competency holders throughout contract life;
(4) They will also review of subcontracting plans and programs of large prime contractors to determine the extent that they are providing subcontracting opportunities to small businesses, veteran-owned businesses, service-disabled veteran-owned businesses, HUBZone qualified businesses, small disadvantaged business, and women-owned small businesses;
(5) When they give you consultation and advice for small businesses requesting assistance on government procurement or property sales matters, you must keep in mind that all consultants are not the same. It is very important to get one that you like and is passionate about their job.
(6) They will also help you with specific contract administration problems;
(7) They will see if you qualify for the SBA's procurement and financial programs;
(8) By doing this they want to breakout of items from a the same old stale source of buying in favor of full and open competition in order to achieve savings;
(9) One of the goals that they have is to review small business programs at Federal buying activities to evaluate effect on small business participation and recommend changes; and
(10) management of the Central Contractor Registration's Dynamic Small Business Search, a nationwide Internet database of information on small business, a marketing tool for small firms and a "link" to procurement opportunities. It pays to at least get registered and listed in this data base.
Existing and potential small businesses are eligible to apply. A small business is a business entity organized for profit, with a place of business located in the United States and which makes a significant contribution to the U.S. economy through payment of taxes and/or use of American Products, materials and/or labor.
Generally, an employee based size standard not in excess of 500 employees is used for manufacturers for wholesalers, average employment not in excess of 500 is used; for general construction, a revenue based size standard not over $28,500,000 is used; for specialty trade construction, revenues not over $12,000,000 is used; for retail and services contracts, revenues not over $6,000,000 is used; and for agricultural enterprises, gross annual sales not over $750,000 is used.
Self-certification of documentation is sufficient for representation as a small business, women-owned small business, veteran-owned small business and service-disabled veteran-owned small business. SBA certification is required for status as a HUBZone small business, 8(a) small business, and Small Disadvantaged Business.
The range is about 15 days for certificate of competency; no approval is required on other programs for this .small business opportunity.
The government grants that guarantees this small business opportunity programs for small business grants totaled: FY 04 $4,606,675,000; FY 05 est $3,250,000,000; FY 06 est $3,000,000,000. Administrative Expenses: FY 04 $38,013,000; FY 05 est $34,188,000; and FY 06 est $36,406,000
In fiscal year 2004, $11.2 billion in government grants for prime contracts was set-aside for procurement limited to small businesses to give you an excellent small business opportunity.
Title 13, Code of Federal Regulations, Part 125; "Government Contracting Programs;" Government Contracting and information for this small business opportunity from SBA offices. Forms to obtain necessary assistance are provided by SBA field offices. To find where they are listed you can go to Associate Administrator for Government Contracting, Small Business Administration, 409 3rd Street, SW., Washington, DC 20416. Telephone: (202) 205-6460 http://www.sba.gov
Other small business opportunity programs that are related to selling to the federal government are:
17.301, Non-Discrimination and Affirmative Action by Federal Contractors and Federally Assisted Construction Contractors can use this small business opportunity;
17.303, Wage and Hour Standards;
36.001, Fair Competition Counseling and Investigation of Complaints;
39.001, Business Services is another small business opportunity;
43.002, Technology Transfer is the chance to participate in another small business opportunity;
59.006, 8(a) Business Development is a good small business opportunity that you should consider.
I would like to introduce you to the 59.005 Business Development Assistance to Small Business program.
This program is excellent for bringing in new business and revenue. Get help from this program to sell to the government. They will assist your small business in obtaining a "fair" share of contracts and subcontracts for Federal government supplies and services and a "fair" share of property sold by the government.
What an excellent opportunity this is! I would rather sell a lot more to meet my goals than to have to get a small business loans or small business grants.
What they can do for your company is:
(Restriction of bidding/award to small business only)
(1) Your application will set-aside the chance to increase the Federal procurement and disposal requirements awarded to small business for a great small business opportunity;
(2) You will receive consultation with procuring activities on structuring of procurement and sales planning to optimize small business participation;
(3) They will also review and analyze you small business capacity, credit, integrity, perseverance, and tenacity when challenged by contracting officers and certifying competence of such firms to perform as prime contractors, as appropriate, and monitoring performance of certificate of competency holders throughout contract life;
(4) They will also review of subcontracting plans and programs of large prime contractors to determine the extent that they are providing subcontracting opportunities to small businesses, veteran-owned businesses, service-disabled veteran-owned businesses, HUBZone qualified businesses, small disadvantaged business, and women-owned small businesses;
(5) When they give you consultation and advice for small businesses requesting assistance on government procurement or property sales matters, you must keep in mind that all consultants are not the same. It is very important to get one that you like and is passionate about their job.
(6) They will also help you with specific contract administration problems;
(7) They will see if you qualify for the SBA's procurement and financial programs;
(8) By doing this they want to breakout of items from a the same old stale source of buying in favor of full and open competition in order to achieve savings;
(9) One of the goals that they have is to review small business programs at Federal buying activities to evaluate effect on small business participation and recommend changes; and
(10) management of the Central Contractor Registration's Dynamic Small Business Search, a nationwide Internet database of information on small business, a marketing tool for small firms and a "link" to procurement opportunities. It pays to at least get registered and listed in this data base.
Existing and potential small businesses are eligible to apply. A small business is a business entity organized for profit, with a place of business located in the United States and which makes a significant contribution to the U.S. economy through payment of taxes and/or use of American Products, materials and/or labor.
Generally, an employee based size standard not in excess of 500 employees is used for manufacturers for wholesalers, average employment not in excess of 500 is used; for general construction, a revenue based size standard not over $28,500,000 is used; for specialty trade construction, revenues not over $12,000,000 is used; for retail and services contracts, revenues not over $6,000,000 is used; and for agricultural enterprises, gross annual sales not over $750,000 is used.
Self-certification of documentation is sufficient for representation as a small business, women-owned small business, veteran-owned small business and service-disabled veteran-owned small business. SBA certification is required for status as a HUBZone small business, 8(a) small business, and Small Disadvantaged Business.
The range is about 15 days for certificate of competency; no approval is required on other programs for this .small business opportunity.
The government grants that guarantees this small business opportunity programs for small business grants totaled: FY 04 $4,606,675,000; FY 05 est $3,250,000,000; FY 06 est $3,000,000,000. Administrative Expenses: FY 04 $38,013,000; FY 05 est $34,188,000; and FY 06 est $36,406,000
In fiscal year 2004, $11.2 billion in government grants for prime contracts was set-aside for procurement limited to small businesses to give you an excellent small business opportunity.
Title 13, Code of Federal Regulations, Part 125; "Government Contracting Programs;" Government Contracting and information for this small business opportunity from SBA offices. Forms to obtain necessary assistance are provided by SBA field offices. To find where they are listed you can go to Associate Administrator for Government Contracting, Small Business Administration, 409 3rd Street, SW., Washington, DC 20416. Telephone: (202) 205-6460 http://www.sba.gov
Other small business opportunity programs that are related to selling to the federal government are:
17.301, Non-Discrimination and Affirmative Action by Federal Contractors and Federally Assisted Construction Contractors can use this small business opportunity;
17.303, Wage and Hour Standards;
36.001, Fair Competition Counseling and Investigation of Complaints;
39.001, Business Services is another small business opportunity;
43.002, Technology Transfer is the chance to participate in another small business opportunity;
59.006, 8(a) Business Development is a good small business opportunity that you should consider.
Applying for a Business Loan 2012
Copyright 2005 The Powerful Promoter
The process of applying for a business loan is a stringent one as compared to the standard procedures in obtaining a home mortgage loan or a personal loan. This is probably due to the fact that business loans contain a greater risk element as compared to other loans. Therefore, lenders need to exercise greater caution and emphasis when evaluating business loan applications in order to minimize their risk exposure.
With that, lenders evaluate their applicants based on the information that are provided as well as their judgment of the viability and profitability of the business being financed. Thus, business loan applicants will be required to submit a loan proposal along with their applications with the purpose of creating a positive impression upon the lender.
The first element of a loan proposal is an executive summary, providing short descriptions of the type of business and the industry, the purpose and usage of the loan, the proposed repayment conditions as well as the intended loan period. After that, the company information is provided, enriching the reader with the nature of the business, the location of the business, company history, the products or services provided, key differentiation factors of the company or the product, the general growth of the industry, competitive information, growth potential and target customers.
It would help if you could include your company marketing strategy, detailed product information, historical information as well as projected growth plans for the company. Apart from that, if you plan to incorporate product or service extensions in the future, you should provide these descriptions within your loan proposal. If possible, geographical expansion plans will help in the proposal.
The next area that needs to be showcased in the proposal would be the credentials and experience of each member of the management team. Impressive credentials will provide assurance to the lender that the company is managed by individuals who are responsible and capable. This is important as having the wrong people managing the company could be detrimental for the business.
In any loan application, historical records are essential to be used in evaluating the performance of a company. As new companies do not yet have these records, the financial records of the owners will be used as the basis of evaluation. Income tax returns forms are also required by lenders. All of these records provided should be the latest copies less than 90 days old, with the exception of the income tax returns form.
If the loan is applied for an existing company in active operations, company financial statements, including profit and loss accounts, balance sheets and the net worth reconciliation record should be included in the loan proposal. Again, all of this information should also be the latest and less than 90 days old. Additionally, a listing of accounts receivables and other short term and long term debt should be attached.
On the other hand, if the loan application is submitted for a new business, a pro-forma balance sheet and profit and loss account should be provided. Apart from that, a cash flow projection for the upcoming year is drafted to indicate the possibility of recovering the debt. This also means that projected revenue, profits, costs incurred and expenditure should be listed out with definite explanations provided as well as a list of assumptions.
If you possess assets that you wish to use as collateral for your loan, details for this should be provided to the lender as well. It is often common for lenders to request for dual sources of repayment in the event that one source is defaulted. This means that if the business owner defaults on his repayments, the collateral can be sold in order to recover debt.
Finally, other documents normally required for a loan application would be items like the article of incorporation, lease agreements, partnership agreements, license, references, etc. As the list of required documentation, information and attachments differs between lenders, it is best to check with the individual lender on their specific information and documents required to be attached with the loan proposal.
The process of applying for a business loan is a stringent one as compared to the standard procedures in obtaining a home mortgage loan or a personal loan. This is probably due to the fact that business loans contain a greater risk element as compared to other loans. Therefore, lenders need to exercise greater caution and emphasis when evaluating business loan applications in order to minimize their risk exposure.
With that, lenders evaluate their applicants based on the information that are provided as well as their judgment of the viability and profitability of the business being financed. Thus, business loan applicants will be required to submit a loan proposal along with their applications with the purpose of creating a positive impression upon the lender.
The first element of a loan proposal is an executive summary, providing short descriptions of the type of business and the industry, the purpose and usage of the loan, the proposed repayment conditions as well as the intended loan period. After that, the company information is provided, enriching the reader with the nature of the business, the location of the business, company history, the products or services provided, key differentiation factors of the company or the product, the general growth of the industry, competitive information, growth potential and target customers.
It would help if you could include your company marketing strategy, detailed product information, historical information as well as projected growth plans for the company. Apart from that, if you plan to incorporate product or service extensions in the future, you should provide these descriptions within your loan proposal. If possible, geographical expansion plans will help in the proposal.
The next area that needs to be showcased in the proposal would be the credentials and experience of each member of the management team. Impressive credentials will provide assurance to the lender that the company is managed by individuals who are responsible and capable. This is important as having the wrong people managing the company could be detrimental for the business.
In any loan application, historical records are essential to be used in evaluating the performance of a company. As new companies do not yet have these records, the financial records of the owners will be used as the basis of evaluation. Income tax returns forms are also required by lenders. All of these records provided should be the latest copies less than 90 days old, with the exception of the income tax returns form.
If the loan is applied for an existing company in active operations, company financial statements, including profit and loss accounts, balance sheets and the net worth reconciliation record should be included in the loan proposal. Again, all of this information should also be the latest and less than 90 days old. Additionally, a listing of accounts receivables and other short term and long term debt should be attached.
On the other hand, if the loan application is submitted for a new business, a pro-forma balance sheet and profit and loss account should be provided. Apart from that, a cash flow projection for the upcoming year is drafted to indicate the possibility of recovering the debt. This also means that projected revenue, profits, costs incurred and expenditure should be listed out with definite explanations provided as well as a list of assumptions.
If you possess assets that you wish to use as collateral for your loan, details for this should be provided to the lender as well. It is often common for lenders to request for dual sources of repayment in the event that one source is defaulted. This means that if the business owner defaults on his repayments, the collateral can be sold in order to recover debt.
Finally, other documents normally required for a loan application would be items like the article of incorporation, lease agreements, partnership agreements, license, references, etc. As the list of required documentation, information and attachments differs between lenders, it is best to check with the individual lender on their specific information and documents required to be attached with the loan proposal.
Alternative Venture Finance: Federal Grants and Loans 2012
While most companies seeking venture capital initially think about angel investors and venture capitalists, a large alternative source of financing is federal grants and loans. The two largest federal grant programs are run by the Small Business Administration (SBA), and by Small Business Investment Companies (SBICs).
An SBA loan, regardless of whether it is a direct loan from the SBA, or, as is more common, a bank loan guaranteed by the SBA, is essentially a bank loan. The benefit of it versus a traditional bank loan is the rate. SBA rates are typically much less than traditional business loan rates.
In most cases, in a guaranteed SBA bank loan, the SBA guarantees 90 percent of the loan will be repaid to the bank. As such, banks are at much less risk than in most other loans, and are a bit more flexible with regards to who they offer these loans. However, the SBA usually requires the founders of the company to personally guarantee the loans, which makes them risky should the venture collapse.
Alternatively, Small Business Investment Companies (SBICs) are privately organized corporations that are licensed and regulated by the SBA. Small or emerging businesses which qualify for assistance from the SBIC program can receive equity capital and/or long-term loans from these companies. Essentially, these companies provide their own capital, which is supplemented by federal funds, to the companies they fund.
Interestingly, U.S. taxpayers benefits from the SBIC program as tax revenues generated from successful SBIC investments have more than covered the cost of the program. Likewise the program has created hundreds of thousands of jobs.
In summary, SBA and SBIC financing are viable alternatives to financing from angel investors and venture capitalists and should be considered in the capital raising process. Similarly to angel and VC financing, companies seeking SBA and SBIC financing need a strong management team and value proposition, and a highly professional and compelling business plan in order to raise the capital they need.
An SBA loan, regardless of whether it is a direct loan from the SBA, or, as is more common, a bank loan guaranteed by the SBA, is essentially a bank loan. The benefit of it versus a traditional bank loan is the rate. SBA rates are typically much less than traditional business loan rates.
In most cases, in a guaranteed SBA bank loan, the SBA guarantees 90 percent of the loan will be repaid to the bank. As such, banks are at much less risk than in most other loans, and are a bit more flexible with regards to who they offer these loans. However, the SBA usually requires the founders of the company to personally guarantee the loans, which makes them risky should the venture collapse.
Alternatively, Small Business Investment Companies (SBICs) are privately organized corporations that are licensed and regulated by the SBA. Small or emerging businesses which qualify for assistance from the SBIC program can receive equity capital and/or long-term loans from these companies. Essentially, these companies provide their own capital, which is supplemented by federal funds, to the companies they fund.
Interestingly, U.S. taxpayers benefits from the SBIC program as tax revenues generated from successful SBIC investments have more than covered the cost of the program. Likewise the program has created hundreds of thousands of jobs.
In summary, SBA and SBIC financing are viable alternatives to financing from angel investors and venture capitalists and should be considered in the capital raising process. Similarly to angel and VC financing, companies seeking SBA and SBIC financing need a strong management team and value proposition, and a highly professional and compelling business plan in order to raise the capital they need.
9 things you must do to maximize your chances of obtaining a small business loan
To get approval for your small business loan application, you must be able to meet the lending criteria set down. Some organisations are more risk averse than others, and will therefore have more stringent criteria.
To vastly increase your chances of a successful funding application, you will need to present the following information:
1. The reason for the loan. The lender will be looking for something that fits within the normal range and expertise of your business. The amount may cover a number of items, so you will need to cover each.
2. The amount required, and the repayment term of the small business loan you want. (e.g. $10,000 term 5 years, payable quarterly).
3. Details of how you will repay the amount borrowed. For example, From the increase in profits of reduced running costs of the Whizzbang Go4It
4. Details of security you will be able to offer to the lender. This will act as reassurance for the lender. If youre not prepared to put up some aspect of security, then why should they?
5. You will need to include your business plan which will serve to answer essential questions relating to management capabilities, information about the market you operate in. What kind of business you are in etc.
6. 3 Years financial statements. You will need to present quality financial information from your accounting software, preferably signed off by your accountant or tax advisor.
7. Latest Set of Management accounts. Again produced from your accounting software.
8. Accounts receivables (debtors) and payables (creditors) ageing reports.
9. Principals financial statements. Particularly required if some form of security is necessary.
If you are a new company, the emphasis is going to be on your business plan , and the security (also called collateral) you or your business can provide against the loan.
You must take the time to practice presenting your case to the bank or lender to iron out any glitches. Practice on your colleagues and family (you never know, they might be so impressed, they'll invest or lend!). It may help to role play the lender and come up with as many pointy questions as possible. The more time you take the better your chances will be. (But remember, dont fall into the analysis paralysis trap!)
Good luck!
To vastly increase your chances of a successful funding application, you will need to present the following information:
1. The reason for the loan. The lender will be looking for something that fits within the normal range and expertise of your business. The amount may cover a number of items, so you will need to cover each.
2. The amount required, and the repayment term of the small business loan you want. (e.g. $10,000 term 5 years, payable quarterly).
3. Details of how you will repay the amount borrowed. For example, From the increase in profits of reduced running costs of the Whizzbang Go4It
4. Details of security you will be able to offer to the lender. This will act as reassurance for the lender. If youre not prepared to put up some aspect of security, then why should they?
5. You will need to include your business plan which will serve to answer essential questions relating to management capabilities, information about the market you operate in. What kind of business you are in etc.
6. 3 Years financial statements. You will need to present quality financial information from your accounting software, preferably signed off by your accountant or tax advisor.
7. Latest Set of Management accounts. Again produced from your accounting software.
8. Accounts receivables (debtors) and payables (creditors) ageing reports.
9. Principals financial statements. Particularly required if some form of security is necessary.
If you are a new company, the emphasis is going to be on your business plan , and the security (also called collateral) you or your business can provide against the loan.
You must take the time to practice presenting your case to the bank or lender to iron out any glitches. Practice on your colleagues and family (you never know, they might be so impressed, they'll invest or lend!). It may help to role play the lender and come up with as many pointy questions as possible. The more time you take the better your chances will be. (But remember, dont fall into the analysis paralysis trap!)
Good luck!
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