When you’re starting a business, access to capital is essential. But it is not enough to simply have sufficient financing; knowledge and planning are required to manage it well. These qualities ensure that entrepreneurs avoid common mistakes like securing the wrong type of financing, miscalculating the amount required, or underestimating the cost of borrowing money
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.
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