Let’s talk about loans for your business, shall we? I recently had the opportunity to go to a fabulous conference for entrepreneurs and one of the speakers talked about taking the mystery out of financing for small businesses. This presentation could not have come at a better time for me. I hope you find some of what the Assistant Vice-President of Commerce Bank in Peoria, IL said as helpful as I did.
When considering a business loan, the most important thing you can do is go talk with your banker. They can help you decide what type of loan might be right for you. If you are requesting a relatively small amount, for example, you might consider a personal loan, a home equity loan, or a secured line of credit rather than a full-blown SBA loan. Banks also provide resources that will help strengthen your business plan, such as those available on this site.
Regardless of what type of loan you decide to use, banks will generally look for the same five things: character, capacity, capital, collateral, and conditions.
Character What are you like as a person? Do you value the moral obligation to pay back the loan? What is your business’ story, including length of time in business and proof of quality service to customers?
Capacity Will you be able to pay back your loan? How much debt does your company already have, and can it viably take on any more debt? Even if you are getting an SBA loan, the bank will take a look at your personal finances, including your past two years of tax returns and a personal financial statement. The bank will also examine your business financials including financial statements, debt to income ratio, and other financial indicators.
Capital The bank will use your personal investment in the business as proof that you are dedicated. If you have not committed blood, sweat, time, and money into your business already; you can’t expect the bank to do it either.
Collateral Like any loan, the bank will expect some type of collateral to secure your SBA loan. This could include real estate, vehicles, personal assets, equipment, inventory, or accounts receivable.
Conditions What are current economic conditions? What are the conditions within your industry? Will you really be able to make a go of it, or is your business more likely to fail?
Net-net, make sure you have your 5Cs in order when applying for a loan, and treat your banker as an ally and a resource.