|
Getting the credit you deserve:
the right
people and right numbers can make it happen
By Marian Miller Chang
• Bankrate.com
March 8, 1999 -- The American Bankers Association
describes credit as "the lifeblood of American business," especially
for small businesses. Credit allows entrepreneurs to purchase inventory,
get their businesses off the ground, buy equipment, expand or buy
new lines of merchandise.
Yet if someone owns a small business that is
just starting out, it may be difficult to get financial assistance
from the local bank. A commercial loan officer might be more willing
to listen if the owner can come up with a solid business plan and
at least six months of company financial history.
Think it through
Before even stepping into a bank lobby to request a loan, the ABA recommends
that business owners ask these questions:
- What is the purpose of the loan?
- What amount of financing will meet those
needs? (Rather than: How much can be borrowed?)
- When will the money be needed, and for how
long?
- How will the business generate sufficient
cash flow to repay the loan?
"It's pretty tough for businesses with less
than two or three years of historical data to get a loan," says
Mike Shulewitch, vice president and commercial loan officer for
Sierra West Bank. "We rely heavily on projections in a business
plan, especially if we're doing a (Small
Business Administration) loan." The SBA guarantees some commercial
loans made by banks.
Like many commercial bankers faced with the
bottom line and risk-averse examiners, Shulewitch says his Reno,
Nev., bank "needs something to hang its hat on" when a small business
asks for financial assistance.
"The business plan and historical cash flow
information are vital if we're even going to look at financing a
startup," he says. "We have to be able to look forward in the business
plan, and we rely heavily on management experience in the subject
industry ... If they don't have management skills to run their business,
they're doomed for failure."
The
considerations
At Sierra West, and most other banks nationwide, loan officers examine
applications for five specific criteria: repayment ability, collateral,
capital, equity, and management and credit. Most problems stem from
lack of management, Shulewitch says.
"Unless they can show me a manager who's been
in the business for a while, and add him to their business plan
-- then we may be able to consider the application," he says. "Of
course, then they have to give him or her a piece of the action."
Numbers that make sense are essential to any
good business plan. If they're not there, the bank will toss the
loan application back with a polite refusal, or a request that information
be provided to back up the figures it contains, Shulewitch says.
"We refer many of our small business applicants
to a program here in Reno that assists businesses by critiquing
their plans," he says.
Preparing
to apply
The University of Nevada-Reno Small Business Development Center
operates in conjunction with the SBA and the Service
Corps of Retired Executives. It provides seminars and one-on-one
assistance to business owners who may need to fine-tune their business
plans. "We send at least five or more people a week to the Small
Business Development Center, and they get the help they need in
formulating a business strategy," Shulewitch says.
Those about to apply for commercial loans would
be well-served to rid their companies of excess debt, he says. "We
are going to look at what they need to live off of to service their
debt, so if they have a lot of credit card or revolving debt, we're
going to ask them to get rid of it, or pay it down as much as possible."
And bad credit that appears on the personal
financial reports of the owners or business needs to be cleared
up. "If a small business didn't pay Bank ABC, the obvious question
then would be, why would they pay us back if we gave them a loan?
We consider that a blatant credit error, but we will listen to plausible
explanations," Shulewitch says.
Startup businesses are the highest risks that
banks have, so banks try to get as much collateral as they can up
front.
"If the project cost is $100,000, then the business
owner has to come up with $33,000 so they have something at risk,
too," Shulewitch adds. "We look at other outside collateral sources
as well. We have to have something to lean back on. That's why many
small-business owners get mom and dad or other relatives to co-sign
or provide funding and act as a guarantor.
"It sounds tough, but small business startups
are the riskiest loans out there, and it's hard to get credit when
you have no credit history."
Marian Miller Chang is a freelance
writer
To comment on this story, please e-mail the
Bankrate.com
editors
-- Posted: March 8, 1999
|
