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    3 Replies Latest reply on Aug 15, 2008 9:41 AM by Milleisen

    Business Loans 101

    Milleisen Scout
      In an effort to de-mystify the commercial lending process, I'd like to throw out a few helpful tidbits for all those who are unaware of what lenders want to see:

      Your Personal Credit - Beyond the actual score, banks do not look kindly on lateness (30, 60, or 90 days), chargeoffs, bankrupty, and maxed out balances. All of these are indicative of financial problems and/or irresponsibility. If you didn't repay someone who you owed money once, chances are much higher that you'll do it again. There is no such thing as "erasing" bad credit. If you were late on a payment, it's there to stay unless you can prove it wasn't late. Lenders cannot change facts, and would be exposed to liability if they mis-represented your repayment history.

      Personal Financial Statement - This is a summary of your personal assets and liabilities. Owning real estate, stocks, bonds and other valuable assets will help you, while large personal debt obligations will hurt you. In almost all cases, you will be asked to personally guaranty the loan. The stronger your PFS (ie having liquid assets or a high net worth), the more comfortable a lender will feel about lending to your business.

      A strong net worth and pristine credit are often the difference between a borderline loan being approved or denied.

      Business financials - with at least a two year track record, banks will want to perform a trend analysis. Is your business headed in the right direction? The single most important item that banks want to identify is cash flow (sometimes known as EBITDA). They want to know that your business generates enough cash to service all of your obligations in addition to their debt. Banks often will look at cash flow coverage,which is simply the ratio of your cash flow to your debt service. Rule of thumb is that you want your cash flow coverage to be 1.25 times.

      Business Plans - While a critical tool for entrprenuers to have, lenders will never lend to you based on projected income. You can have your plan professional written, bound and printed with all sorts of graphics, research and charts - all of which make a case for why your business will succeed. Unless it already has generated income, that plan will carry little weight. A banker who reads a business plan and approves it because they like the idea is a TV invention. I always used to tell my clients that while I love their ideas, only historical success will help me make a case for them

      If your business is not a strong candidate for a business loan, it doesn't mean that you can't get financing anywhere. It does mean that you will on average pay more, and you will stumble onto some unscrupulous people who claim they can help you, but are really looking to take your money and run. If it sounds too good to be true, it likely is. So when some website tells you something like "Bad credit, no collateral? No problem!", chances are that their loans will benefit them more than they'll help you.

      There are banks that are willing to work with you and get creative, but in cases like these you need to have an open mind. If you hope to reach an agreement that works for both parties, you have to be open to finding other guarantors or putting up collateral (like your home).

      I hope this helps some of our entreprenuers!
        • Re: Business Loans 101
          AEP_Corp Newbie
          Milleisen,

          Thank you for your post on this important topic. I am in the process of putting together the business plan for a franchise that I am going to purchase. Even with 6+ years of bankruptcy discharged, and a stellar credit history since; my own bank will not even give me the time of day.

          You mentioned that there are banks willing to be "creative", and I was hoping you could be more specific? If you would rather not post bank names/contacts, please respond to my email: aepventures@gmail.com

          Thanks!
            • Re: Business Loans 101
              Milleisen Scout
              When I say "creative", I'm really referring to the fact that community banks as a whole are more flexible than money center banks...I don't have any specific lenders in mind. With community banks, decisions are local and they often have lattitude when looking at a requests.

              It's important to remember that "creative" is not synonymous with "easy". Smaller banks don't have the volume that large banks have so they are willing to work with a client to get a deal done but Credit fundamentals still apply...they are just more open to finding ways to mitigate deficiencies.
            • Re: Business Loans 101
              babydahl54 Newbie
              Great points. I have the same question? What do you mean about banks getting creative??? I can be reached ay babydahl54@yahoo.com. Thanks!