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Making Your Business Bankable
You need money. Banks have money. Here's what they want to lend you some
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Business New Haven
10/29/2001
By: Fiona Phelan
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With interest rates at their lowest since 1962, now is a particularly advantageous time to start your own business. Despite the overall downturn in the economy, banking executives say that this is a prime time to get a loan.
Before rushing out to your nearest bank office with dollar-bill signs dancing in your eyes and thoughts of being your own boss, however, be sure your personal financial house is in order: Get a copy of your personal credit report to be sure there are no discrepancies; be sure that mortgage payments, credit cards and bills are paid in a timely manner.
“Banks will look very closely at your personal credit history when you're applying for a loan to start a business,” notes Michael LaBella, senior vice president and manager of small-business services at Fleet Bank. “The state of your personal finances can be an indicator of what might happen within your own business.”
Past credit problems should be resolved before applying for a small-business loan. If they cannot be corrected, be sure to explain to the loan officer the circumstances surrounding the problem: Was there a divorce? Death in the family? Children going to college? Unemployment? Disability? If the poor credit history can be explained and the applicant is working hard to resolve the problem, the bank will still consider the loan request.
“Because start-up businesses are more risky than buying an existing business, banks will look even more closely at your personal credit history because it's a good indicator of how finances will be handled for the business,” says LaBella. “No one wants to be surprised during the application process about past credit problems. If there has been a problem, be sure to explain what happened.”
Even people with poor credit history can get a loan to start a business if the reasons behind the problems have reasonable explanations, bank officials say.
Even past business ventures that failed do not necessarily disqualify an individual of getting another small business loan. The business may have failed for legitimate reasons and not just poor management or financial practices.
Once your financial house is in order, it's time to start looking at what you'll need for your proposed business. According to a First Union Bank study, 17.5 percent of companies now worth more than $1 million began with less than $5,000, only one percent began with $500,000 and a plurality of start-ups - 25 percent - began operation with $20,000 to $49,999.
Figuring out how much money you'll need means developing a business plan - a comprehensive document that financial lenders say is an essential component of the loan-application process.
“Some people say their idea is all in their head and they know how it's going to be financed but have nothing down on paper,” notes Greta Johansson, deputy district director for the Hartford office of the U.S. Small Business Administration. “That's not going to cut it. A well-developed business plan shows that you've done your homework.”
The SBA does not lend money, but guarantees loans endorsed by another lender such as a bank. The benefit of an SBA-guaranteed loan is very often better interest rates and longer terms of repayment, says Johansson.
For the SBA's fiscal year 2000, more than 1,000 loans were guaranteed to small businesses in Connecticut, representing more than $176 million.
A good business plan will include the following elements: executive summary; general description of the business (its location, and legal structure); a description of products and services; the cost of the products and services and their benefits; short- and long-term goals; market and industry data; list of current customers and competitors; sales methods; inventory and quality control plans; job descriptions and wages; suppliers; qualifications of management team and job functions; description of the decision-making process; and, of course, the company's immediate and future financial requirements.
Immediate monetary needs include: living costs, employee wages, rent, advertising, supplies, utilities, insurance, taxes, maintenance, delivery/transportation, to name a few.
Many experts say you must figure on living off your capital for at least three months, perhaps longer, depending on the industry. Once you've arrived at a number, multiply that by 1.25 so that you'll have an extra 25 percent to cover unforeseen miscellaneous expenses.
According to the SBA, once building and equipment needs have been taken care of you, must have enough money on hand to cover operating expenses for at least a year. One of the leading causes of business failure, the SBA notes, is insufficient start-up capital.
The SBA and many banks provide free information and counseling for business-plan development. The Connecticut Small Business Development Center (SBDC) has counselors around the state who provide one-on-one advice as well as business fundamentals workshops.
The Service Corps of Retired Executives (SCORE) provides daily counseling and monthly workshops through its extensive, statewide network of volunteers. The state's two Women's Business Centers provide a range of services including long-term, focused education programs. The Hartford Business Information Center hosts programs and provides counseling services and a resource library.
In addition to the overall business plan, lenders will look closely at the experience and skills of the applicant. For instance, says the SBA's Johansson, lenders may shy away from a proposal to open a restaurant if the borrower has had no experience with that industry. However, she adds, if the borrower has a partner who has been in food service and the borrower lends some other kind of expertise to the business, then all is not lost.
“There really has to be some rationale for going into the type of business the borrower is proposing,” she says.
In addition to experience, lenders also look for personal investment in the proposed business. The investment can come from personal finances, home equity, credit cards, family loan, a business partner or even venture capital.
“We look for at least a 10 percent equity investment from the borrower,” says Louis J. Paffumi, vice president and manager of the community lending department at People's Bank. “There's nothing written in stone that says what the investment has to be - each transaction is different.”
“We like to see enough collateral, ideally better than one-to-one coverage,” notes Johansson. “We like to see the owner invest in the company, but there's no criteria that says you have to have a certain percentage. A lot of people use family money or they pledge their home as collateral, and there are many ways to come up with the investment.”
Risking your own money gives confidence to others to invest in your business, notes the SBA's online guide to starting your own business (www.sba.gov) . Other sources include commercial finance companies, venture capital firms, local development companies and life insurance companies. Trade credit, selling stock and leasing equipment offer alternatives to borrowing, the SBA says.
“The best place to start looking for money for your business, once you have the business plan and all the documentation in place, is the bank where you conduct your personal business,” says Andreas Kapentanpoulos, assistant vice president for government-guaranteed lending at People's Bank. “It will also be much easier to get another loan with that bank if you're already doing business there.”
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