Credit is the oil that lubricates the machinery of business. Whether it’s a loan to buy supplies, equipment, meet payroll, fund a new franchise or other operating expenses, credit will likely be a part of the transaction.
Unfortunately, the upheaval in today’s economy has resulted in a credit crunch that seems to have made it tougher than ever for business owners to swing a loan.
Still, for those in the know, there are enough options available to make the task a little easier. Money may be tight, but business loans are being made every day to those who know how to ask for them.
“In today’s banking climate, good deals still get done but with more equity, collateral and much higher credit scores required of the borrower than in the past,” said Linda Feltman of Pennsylvania State University’s Small-Business Development Center.
If you’re looking for financing for your business, now or in the future, here are some choices along with hints on how to greatly improve your chances of coming away with the money you need.
The first place most business owners turn to when they need a business loan is their local bank. That’s why it’s essential to build a solid business relationship with your bank well before you need to ask for money. Allowing your bank to become familiar with your business sets the stage for when you need to ask for a loan.
Even after establishing a relationship, some business owners meet with frustration when the bank turns down their loan application. Most bankers agree this is often because the owner has failed to come prepared with the information a lender needs to make a positive decision.
“How to find the money to finance a renovation, expansion or other need is the last thing many business owners think about when they plan a project,” said James G. Marshall, former vice president of Fulton Bank in Lancaster, Pennsylvania. “It’s best to have a team lined up behind you when you plan a major financial move. Your bank should be a member of that team.”
How should you prepare for a meeting with a bank loan officer? Marshall suggested you come armed with:
• Financial statements for your existing business
• Accountant-prepared financial projections and cash flow analysis
• Marketing feasibility study for the project
• Owner’s personal financial statements and tax returns
• Information on the background and experience of owner(s)
“With this information the bank can give proper consideration to your loan application,” Marshall said. “Be careful to avoid the red flags that may raise concerns in the mind of a loan officer such as an applicant who has over-leveraged himself or recently financed the purchase of an expensive asset. And, of course, it’s absolutely essential the applicant be honest and up-front with all pertinent information.”
What Happens When the Bank Says No?
When your best efforts fall on deaf ears at your local bank all is not lost. Here are some alternate sources of business financing that may meet your needs:
· State Government Programs
Most states have loan programs designed to provide small business financing. Some of these programs provide loans at lower than market interest rates, provided the business will create jobs in the state. Some states partner with local banks in lending arrangements designed to attract, retain and expand businesses. Typical of these is a partnership between the State of Ohio and Huntington Bank, known as the Ohio Huntington Business Loan Program. It has provided more than 2,000 small- and medium-size Ohio businesses with loans totaling $465 million.
For information on small business financing programs in your state, contact the office of your state representative or state senator.
· Federal Government Programs
The federal government also has loan programs available to assist small business owners. The most popular of these is the Small Business Administration’s (SBA) guaranteed loan program that guarantees up to 80 percent of the loan principal. This program gives your bank an incentive to lend to a borrower who does not otherwise meet the bank’s lending guidelines.
Among other SBA loan programs available to small business owners is the 504 loan. Established in 1980, the 504 Loan Program provides long-term, fixed-rate financing for major fixed assets, such as real estate, facilities construction, expansion or other fixed-asset needs. If you decide to seek an SBA loan, your best bet is to work through a certified or preferred lender. The SBA’s guaranteed loan process is rather complex, so choose a lender who has experience working with them. To find certified or preferred lenders, visit the SBA website or call your local SBA office for guidance. The SBA has local and regional offices in every state. You’ll find their phone number in the federal government section of your local phone directory or for detailed information on all SBA programs, visit: www.sba.gov
· Small Business Investment Companies
Small Business Investment Companies (SBIC) are private investment firms licensed by the SBA to provide investment financing and long-term loans to small businesses. Some SBICs make only equity loans, others provide debt loans and some provide both. As a rule, SBICs will require the same level of collateral and credit ratings as banks.
For information on how to contact an SBIC, check with your local SBA office or log on to the SBA website.
· Local Economic Development Organizations
Your local Chamber of Commerce or other business group may have some revolving loan funds available to businesses specific to your community. Generally, these funds come from local resources and have specific guidelines for their use.
Begin by contacting the director of your local Chamber of Commerce to see what help might be available for the specific purpose you have in mind.
· Angel Investors
When conventional financing options seem out of reach, many business owners have had success seeking individuals or commercial lenders willing to invest in a business expansion, either with debt financing or by taking an equity position in the business. When you find an “angel” investor, you’ll probably find that this option is more flexible than a bank loan or government program.
If you don’t know anyone with the economic firepower to fund your loan, don’t give up. There is an entire industry of professional investors looking for opportunities to invest in growing businesses. For more information on how to match up with an investor who might be interested in your situation, visit: www.entrepreneur.com/money/howtoguide/article52742.html
Keep in mind unless you’re willing to give up an equity position in your business, working with a professional investor is not for you.
When All Else Fails
Depending on the size and economic health of your business, the only source of expansion money available to you may be what you can dig up on your own. Be advised, each of the following money sources carries special risks:
· Friends and Family Members
If you have a friend or family member able to help finance your growth, you may find this to be the easiest type of loan to obtain. Use caution. Most financial experts agree that mixing business and personal relationships can lead to destructive problems in both your business and personal life. If you do take a loan from a friend or family member, make sure all details are carefully spelled out in a written contract.
· Credit Card Financing
If your needs are modest, you may have credit cards with lines of credit substantial enough to fund all or part of your financing needs. While it can be tempting to simply charge everything, this is arguably the riskiest and least desirable of all financing methods. The burdensome interest rates charged by credit card issuers these days can become impossible to meet if your business hits even a minor bump in the road. The result could be a severely damaged credit rating or even the loss of your business.
· Special Needs for Financing a Franchise
“While many methods for obtaining money to finance a franchise are the same as those for any other purpose, there are special needs that should be considered for those desirous of funding a franchise,” said Marianne McKinney, owner of Alliance Star Franchise Financing. “With our assistance we advise franchise applicants of the best approach to present their loan request to the bank, preventing any mistake in their representation. We complete the entire SBA loan request including the business plan, budget projections and submit it to our approved lenders. We take complete care of the process from the initial prequalification until the doors of the store are opened.”
For more information, visit: www.astarfranchisefinancing.com
When you need to raise money for your business, a thorough and detailed business plan is the key to the safest and most desirable types of financing. While unconventional sources of money may seem the easiest to find, they are seldom the wisest choice.