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* collateral that you will use to secure the payment of the
loan. Collateral can include business and personal assets such as
inventory, equipment, and accounts receivable or real estate,
stocks, bonds, and automobiles.
* financial statements, both personal and for the business. The
business financial statement should be provided for the last three
to five years of operation including a year-to-date interim
report. It should contain a balance sheet showing business assets
and liabilities, and a profit-and-loss statement showing revenues
and expenses. The lender uses this information to calculate a
debt-to-worth ratio for the business. Be prepared to provide
copies of tax returns for the business for this same period.
The personal financial statement should list your assets and
your liabilities. Identify the names in which title to each asset
is held and its fair market value. You should be prepared to
provide copies of your personal tax returns. You may be asked for
a list of credit references. Lenders will check your personal as
well as your business credit rating.
Lenders will carefully examine your financial statements and
business projections. As a borrower, you must be fully prepared to
answer questions about them.
* personal guarantees of the owners or other principals usually
are required, even from an established business. The lender also
may request another party's guarantee such as a cosigner or a
surety, or may request a government guarantee from the U.S. Small
Business Administration or other government agency.
In addition to the personal guarantee that you give, under the
Equal Credit Opportunity Act the lender is allowed to require
another person's guarantee should your application fail to meet
the lender's standards of creditworthiness. If all or most of the
assets listed on your personal financial statement are owned
jointly with your spouse, or with someone else, the lender is
likely to require such a guarantee, But the lender may not require
that your spouse be the guarantor.
In the case of secured credit, the lender is allowed to obtain
a spouse's signature on certain documents when the applicant
offers, as security for the loan, property that the two own
jointly, In this case, the spouse or other co-owner may be asked
to sign documents--such as a mortgage or other security
agreement--that would be necessary under applicable state law to
make the property available to satisfy the debt.
Sources of Technical Assistance
Before you approach a lender, you might want to seek the advice
of another, more experienced "set of eyes" to review your business
proposal, particularly if you are a first-time borrower. By doing
so, you'd be getting the loan package in shape to make it easier
for the lender to reach a favorable credit decision. There are
some business support groups whose members could counsel you on
how your package looks. A qualified counselor might even discover
that you really don't need more money, and instead suggest better
inventory control, improved marketing techniques, or other changes
that could actually solve your growth problems. One source of
counseling available to small businesses is the Service Corps of
Retired Executives (SCORE), which is sponsored by the U.S. Small
Business Administration. Others might include accountants and
financial advisers.
Once you are satisfied that your proposal is in good shape to
present to a lender, set up an appointment to discuss your
application. You will find that the lender can also be an
excellent source of business and financial counsel. If Your Application Is Not Approved
Most lenders, banks especially, are conservative in granting
business loans. Given the obligation to their stockholders and
depositors, they need to be sure there's a good chance the loans
they make will be repaid.
If your application for credit is not approved, find out the
reasons why. Some of the reasons that lenders often give for
denying a business loan include, for example, insufficient owner's
equity in the business; lack of an established earnings record; a
history of slow or past-due trade or loan payments; or
insufficient collateral. Finding out the reasons may help you
qualify the next time you apply.
The lender will keep you informed about the status of your
application. If you are considered a "small business" (when your
business revenues are $1 million or less, or when you are applying
to start up a business), a lender has 30 days to let you know,
either orally or in writing, whether or not you get the loan. The
30-day period begins after the lender has received all of the
information needed to evaluate your credit request. If your
application is denied, the lender must give you either:
* a written statement of the reasons for denial, or
* a written notice telling you of your right to obtain the
reasons in writing. This notice may be given to you during the
application process or at the time of the denial.
The lender also will keep for one year the records relating to
your application.
Different rules apply for larger businesses (those with more
than $1 million in revenues}. Within a reasonable period of time
after getting all the necessary information on which to base a
decision, the lender must decide and let you know whether or not
you get the credit. Then you'll have 60 days in which to ask for a
written statement of the reasons why you were denied credit; this
is important to remember because the lender need not notify you of
this right. The creditor will keep records of your application for
at least 60 days after telling you of the credit decision. If you
request that records be kept longer, or ask for a written
statement of the reasons for denial, records will be kept for one
year.
Continued on Next Page
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