The need for financing is a critical and
perennial concern for the owners of small businesses or
women-owned businesses. Indeed, few
things are as crucial to the health of a small business operation.
Many small businesses are launched by the personal resources of
their owners. But they can quickly reach the stage where the owner
must look to the credit market for financial help in expanding
operations. The banking industry is an important source of working
capital. However, women entrepreneurs may not realize that applying for
commercial credit is a more customized process than obtaining
consumer credit, and requires a great deal of preparation by the
business applicant. This guide may help to de-mystify the
process and improve your chances of getting the credit you need.
Types of Loans
Banks and other financial institutions can assist you by
providing funds through personal or commercial credit. Examples of
personal credit include automobile loans, credit cards, and home
mortgages. Commercial credit includes business loans; here are
some of the options:
Short-term loans are one of the most common types of business
loans and are usually for less than one year. They can provide
interim working capital for a business temporarily in need of
cash, and are typically repaid in a lump sum when inventory or
accounts receivable are converted into cash.
Intermediate-term loans are often used for a business start-up,
the purchase of new equipment, expansion, or an increase in
working capital. The maturity dates range from one to three years.
Long-term loans generally are made for major capital
improvements, acquiring fixed assets, or business start-ups. The
term of the loan runs for periods of three to five years and is
usually based in pan on the life of the asset financed. Repayment
is usually made in monthly or quarterly installments.
A line of credit offers you the ability to borrow money
repeatedly, up to your credit limit, without having to reapply. A
line of credit is particularly important to businesses that
experience seasonal fluctuations. The lender generally will
perform a review once a year, at which time the borrower is asked
to provide updated financial statements.
The Credit Application Process
Applying for commercial credit can be tedious. It calls for
more documentation than you might initially have expected and
certainly a lot more than when you apply for consumer credit. For
lenders, extending credit to an entrepreneur usually means
customizing the loan to suit the credit needs of that business. So
don't be disheartened by the amount of paperwork needed to
accompany the application. Instead, be prepared!
Among the best assets you can bring to the lender is a well
thought-out and documented business proposal. You need to clearly
state the purpose of the loan (will the money be used for
temporary working capital, buying equipment, or expanding
facilities); the amount of funds needed and for how long; and a
repayment schedule. Your business proposal should include the
following information:
* business description that tells the nature of the business,
describes the product and its market, identifies its customers and
competition.
* personal profile that outlines the background and experience
of each of the principals in a resume.
* proposal that states the type of loan requested and its
purpose.
* business plan that outlines your corporate strategy for the
next three to five years; it will aid you and the lender in
determining whether the business will generate the cash flow
needed to repay the loan.
* repayment plan that tells how you propose to repay the loan
or outlines a repayment schedule. The lender will be expecting you
to repay the borrowed funds from the profits produced by the
business. As a contingency, you might need to develop a plan on
how you would repay the loan if the profits alone turned out to be
inadequate.
* supporting documentation will include copies of pertinent
papers that support the information contained in your loan
proposal--for example, a lease, certificate of incorporation,
partnership agreement, letters of reference, contracts, invoices
or vendor quotes.
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