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Landing a Business Loan

Remember the scene in The Wizard of Oz when the Wizard tells Dorothy to "pay no attention to the man behind the curtain"? Well banks and other issuers of business loans are inviting small businesses to do just the opposite — to look behind the curtain and see that applying for a loan is neither magical nor mysterious.

"A lot of small business owners are intimidated by the loan process," says Wes Sturges, President of the First Commerce Bank of Charlotte. "But they needn't be. Remember, we don't expect small business owners to be financial experts."

Instead of adversarial, the loan process should be viewed as consultative, adds Sturges, whose First Commerce is listed as a "small–business friendly bank" by the U.S. Small Business Administration.1 Nevertheless, business owners must answer fundamental questions about their start–up or existing business in order to have their loan approved.

Three questions for new businesses

Before seeking financing for a start–up, Sturges advises all hopeful business owners to answer the following three questions:

  1. What is my business? This sounds like an obvious question, and for this reason it's often overlooked. While the answer is probably clear to you, you need to make sure that it's clear to others. We've all met people who, when asked what they do for a living, speak in catchwords, often leaving everyone within earshot confused. Talking big (even if you have justification!) won't help you get a loan. Practice describing your business — in simple, concise terms — to your friends and family and then ask for feedback.


  2. How and why can I do better than other, similar businesses? This requires a little research. In what ways are existing businesses failing to meet customer demands? What unique approaches or services will your business offer? How will your approach give you an advantage?


  3. How am I going to make money? "If you can't answer how you're going to make money, then don't borrow it," Sturges says. To pay back the loan, after all, you're going to have to make money. Of course, this concern doesn't apply to essential capital equipment, such as delivery trucks or machinery. But capital equipment investments should only be made to support a sound business proposal.
These issues, of course, should be core to your business plan. Addressing all three of these questions will help you bring greater direction and focus to it.

Loan criteria

Once you've answered the above questions, you're ready to build a case for securing a loan. The keys to making a strong case are:

  • A solid credit history
  • Access to capital
  • Industry experience
For this reason, Loren Herbst, a recently retired banker and SCORE counselor with 35 years of experience in commercial lending to small and mid–sized businesses, suggests concentrating your energies on bolstering these three areas.

A good personal credit history

"It's difficult to get a loan for a brand new business when your personal credit is poor," says Herbst. The first step in applying for a loan, then, should be to check your history with a credit bureau.

If you discover your credit history is incorrectly represented, there are measures you can take to correct it. If you know your credit history is less than exemplary, then the only ways to improve it are by paying bills on time and by not overdrawing your accounts. This is not to suggest that a less–than–perfect history will doom your chances. You should simply be prepared to explain your credit history and detail how you've taken steps to improve it.

"It's best to be upfront about your credit history," Herbst stresses. "Whoever issues your loan is going to find out about it anyway." Anticipate this fact and you might be able to account and make up for weaknesses.

Access to capital

"It's important when starting a business to have some of your own money to put into the venture," says Herbst. The more personal funds you can invest, the greater your prospects and the more favorable your loan rate. How much should you provide? A good rule of thumb, according to Herbst, is to try and provide 20 to 30 percent of the total. If you need $100,000 to start a new business, you should put forth at least $20,000 to $30,000 of your own money.

If you don't have the money yourself, you might want to ask a relative who has confidence in you and your business plan.

Industry experience

This ties directly into question two above: "How and why can I do better than other, similar businesses?" To demonstrate that your commitment to your business is sincere, it helps to be able to point to industry experience.

Financing for existing businesses

While the loan qualification standards for an existing business are slightly different than for a start–up, the same standards outlined above apply. "An existing business owner, however, might be able to overcome poor personal credit if their business is profitable and its credit history is solid," Herbst says.

One of the differences between new and existing business owners is that owners of existing businesses are usually called upon to provide more paperwork. This paperwork includes financial statements for the past two to three years, a business credit history for the past two to three years, a balance sheet, a recent P&L (profit and loss) statement, and a cash flow statement for the last two to three years.

All of these requirements can seem daunting, especially for business owners who don't have a background in accounting or law. That's why Wes Sturges advises people to review their financial statements with a CPA.

Loren Herbst agrees, adding that "you can even invite a CPA to the meeting you have with your banker."

Requirements for new and existing businesses

Although the requirements will vary from bank to bank, both new and existing business owners should expect to provide:

  • A business plan (owners of existing businesses must include earnings forecasts for the next year)
  • Tax returns for the past two years
  • A personal tax return for the past year
  • Personal financial statements from the owner/owners of the business
  • A plan for paying back the loan in the event of a default. A payback plan can be in the form of a guarantor (a friend or family member who's willing to back up the loan with cash or stocks)
  • Personal collateral (stocks, certificates of deposits, or a car, for instance), or business collateral (business machines or equipment).
If you don't have collateral, Sturges suggests you consider an S.B.A. Guarantee Loan. Though the grounds for the loan will still have to be solid, and the Small Business Administration usually does not guarantee 100% of the loan, Guarantee Loans give banks greater leeway and flexibility with the terms and conditions.

To inquire about S.B.A. loans, call 1–800–8–ASK–SBA and ask for a list of preferred lenders in your area.

Loan structure

One of the most important considerations when applying for a loan is identifying the ideal loan structure. There are two general structures of loans: short– and long–term. Which one you choose, says Sturges, can make all the difference.

To illustrate his point, Sturges offers the following example. If the owner of a t–shirt company needs to buy or lease a new press (a long–term receivable) then that owner should seek a long–term rather than a short–term loan. Taking out a short–term loan (one month, for instance) on a long–term receivable guarantees that the business owner will not make money directly as a result of the loan, which will in turn make short–term payments harder to meet. On the other hand, if this same t–shirt company owner receives an order for 1,000 t–shirts that will be paid for in one or two months, then a short–term loan would be preferable.

A final thought about credit cards

Many successful small businesses have been financed by credit cards. The key with this approach is to have discipline. Some entrepreneurs take out five to ten credit cards and then rotate their debts. This is a high–risk, high–stakes gamble, Herbst cautions, and one that business owners should think twice about playing.

"If after six months on five thousand dollars of credit card debts the business isn't going well, then you might want to stop using your credit cards," says Herbst.


1USBA, "Business Friendly Banks," 1999

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