Hard Facts and Figures

Overview

• 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 (such as an unexpected major illness). 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.
• 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.
• 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.
• Some business are easier to finance than others. 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.
• 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.
• 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 80 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. Ask a business counselor with the Hampton Roads SBDC for additional information on SBA programs.

Common Loan Features

• Loans are long term or short term.
• Interest rates vary depending on the term, type, size, and risk of the loan.
• Repayment may be a lump sum, or on a monthly or quarterly schedule.
• Payments may be delayed until the funds help your business generate cash flow.
• The loan may be committed, meaning the bank agrees to lend to you under certain terms as you need funds without requiring you to re-apply each time.
• Some loans require that you maintain compensating balance levels in a deposit account.

Loan Agreements

You also should be aware that the lender will expect you to agree to certain performance standards and restrictions in order to ensure that your business can repay the loan. These restrictions, known as covenants, representations, and warranties, commonly include the following Common Loan Restrictions:

• Maintenance of accurate records and financial statements
• Limits on total debt
• Restrictions on dividends or other payments to owners and/or investors
• Restrictions on additional capital expenditures
• Restrictions on sale of fixed assets
• Performance standards on financial ratios
• Current tax and insurance payments

Have your records on hand

Be prepared to be asked for any and/or all of the following when you ask for business funding:

• Business Plan
• Equity
• Collateral
• Financial projections
• Personal financial statements
• Tax returns
• Credit report in good standing
• Documented proof of the experience of you and your employees/team