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Capital sources: Commercial banks
 At
some point in the first year or two, growing companies realize that
additional money will be needed for marketing, inventory or product
development. Commercial banks have traditionally been the largest
single source of loans to small business, outpaced slightly for
the first time in 1998 by credit card usage. Perhaps that's because
banks seldom lend money for startups, but are more interested in
offering capital to companies with a history of successful operations.
To maximize efficiency and profits, banks have set
minimum loan amounts at about $25,000 to $30,000. Still, the average
small business bank loan is at least $100,000. Most small business
owners don't need this kind of money, so it pays to ask your bank
if they would consider a smaller business loan.
Start a relationship early on with a bank by opening
checking and savings accounts or purchasing certificates of deposit.
It will mean your bank history and personal contacts will be in
place when you need to borrow, and it can speed up the process.
If the bank approves your application, you will arrange
repayment terms -- usually in monthly payments over a specified
number of years -- until both the principal amount of the loan and
the accrued interest have been paid.
Interest charged on the loan depends on the amount
of risk involved for the bank. A low-risk loan, one secured by collateral
such as property or CDs, would carry interest at close to the prime
rate. As the risk increases, so does the interest rate. The bank
establishes risk factors in many ways, but bases its decision primarily
on available collateral and the credit rating taken from your credit
reports.
Credit reports are a critical factor in credit scoring
systems that lenders use to issue credit cards, mortgages and other
loans. Banks are moving toward refining the business loan to more
closely resemble home equity loans that rely heavily on scoring.
Scoring is really a grading system based on the answers you give
to a number of risk-related questions the bank asks. If you answer
yes to all, you get a favorable interest rate. The more negative
answers you have, the higher the interest rate.
So, if you're considering making a major financial
move it's a good idea to check your credit reports to know where
you stand -- and make sure it's correct.
How business loans work
If you need $100,000 to start up your business and you go to a bank,
first make sure you can supply answers
for the lender. Also be prepared to furnish three years of personal
tax returns, and returns for the business if it's in operation.
Purchase agreements for any property and equipment will also be
needed.
The bank will expect you to put up 20 percent to 30
percent of the amount needed in order to show a commitment to the
business. If you put up 30 percent, that would leave a requested
loan amount of $70,000. Then the bank will require collateral of
value equal to or greater than the amount of the loan. The collateral
can be in the form of liquid assets like CDs
or stocks that can be pledged to the bank, or physical property
and equipment. If the loan will be used to purchase assets such
as equipment, they have collateral value. Interest rates on well-secured
business loans can range from just over prime to prime plus points.
What you'll pay
If you borrow $70,000 from a bank at an interest of 10.5 percent
and agreed to pay back the loan in 5 years, you will have a monthly
payment of $1,505. The interest you pay for borrowing the money
would add up to $20,274 over the life of the loan.
For obtaining micro-loans, those in the $1,000 to
$25,000 range, or if you have insufficient collateral to satisfy
the banks lending requirements, you can contact the United
States Small Business Administration.
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