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6 steps for winning a startup
loan
Dear Small Biz Adviser:
My partner and I just started a small
business. We plan on applying for a small-business loan of about
$50,000 to $100,000 to cover employee salaries for the first couple
of months. We will be doing contractual work with condominium's
and residential communities in which our fees will be included in
their maintenance fees. Our fees will cover all expenses plus a
profit. My partner's credit is excellent; my credit is not very
good. No bankruptcies but a history of late payments (none of which
has been during the last 18 months) and maxed out credit cards.
What are our chances of getting a loan, and what avenues should
we explore to get one? Thank you for your help.
Alex
Dear Alex,
I have good news and bad news. Let us first deal with the bad
news.
A history of late payments always hurts, and hurts
you even more now, when the recession
is drying up loans to small businesses. The problem is compounded
by the fact that commercial lenders are reluctant to issue loans
to startups. I have been in small-business development for 20 years,
and I can assure you the only way a startup will be considered
for funding is if the level and type of collateral, feasibility
of the venture, excellent credit rating of the owners, reputable
outside resources and so much more are in place and consistent with
the loan policies of the bank.
I have another bit of bad news for you. I have helped
develop a lot of business-loan
applications, but I've never seen a successful one in which
the commercial lender was going to finance nothing more than compensation
and benefits. There is no collateral in that type of investment.
Bankers lend money only if they can reasonably expect to get their
money back plus interest. If a business fails, they want something
tangible to seize so they can sell it and recoup their money. But
if your business fails, all they will have to seize is air.
There is also the matter of the little-publicized
term "deferred compensation." Bankers expect owners to
defer their own compensation from the venture until cash flow is
positive and consistent, all expenses (especially the loan) are
paid in a timely manner, and cash reserves are sufficient to meet
three or more months of expenses and emergencies.
Now for the good news: You still may be able to secure
a loan.
I know that doesn't sound so great
given what I described above. However, assuming you have a lucrative,
marketable and feasible venture, a combination of the following
six options may give way to a loan:
- The credit report of your partner is excellent
and sufficiently extensive to outweigh your late payment history,
especially if she or he has a greater share of ownership or authority
and decision-making in the venture.
- Attractive, sufficient levels
of tangible assets are offered up in the process of negotiating
the loan. Clearly, real estate offers good leverage.
- The work history and experience
of you two is directly related to the venture and is substantiated
with successful results in previous employment.
- You and your partner are willing
to defer personal compensation.
- You have written contracts
for services to be rendered. It is one thing to say you will get
the contracts, but quite different to have the contracts in hand.
To many bankers signed contracts represent a much-needed guarantee
you can generate sales.
- You have thoroughly prepared for the startup
of the venture with a
business plan demonstrating feasibility.
There are other conditions that
can help, but these six items can potentially overcome your obstacles.
I wish you well.
-- Posted: Jan. 24, 2002
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