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Archive for the 'Small Business Loans' Category
Problems Building Business Credit Part Two
September 2nd, 2008
By The XBanker
In a previous post, I replied to a reader who is skeptical about building business credit. Here is some more correspondence on this topic:
I appreciate your response to my question. My business is two years old and I have perfect business credit with DNB and an intermediate score with Experian. Additionally, far as personal credit, I did all I could to increase the score.
I have a student loan that will not be paid off any time soon. In the beginning I believed that building perfect business credit would be the perfect solution to my problem. Of course, after I followed the steps I realize ultimately personal credit still plays a factor. I have several trade accounts with small credit lines nothing serious.
But I am looking to obtain a line of credit from $100-$200,000.00 dollars. That is the reason I formed (my corporation) to acquire an existing company. Technically my company is a start up, but through building credit I established creditability of paying on time and my company has matured to the time banks require businesses.
Ms. Detweiler, I’ve been at this for six years with no results. I hired every consultant I can think of. Should I give up? What would you do in this case?
This is a great conversation, because it illustrates some of the myths floating around about business credit. Read the rest of this entry »
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Building Business Credit webcast available now
July 28th, 2008
By The XBanker
The Wells Fargo Small Business Webcast Sound Credit Practices for Your Business is now available. I was honored to be chosen to participate in this panel discussion with leading financial industry insiders and business owners as we talked about how to build business credit, and effectively manage business credit and cash flow. The program focuses on financial management principles that support long-term stability and growth.
Sound Credit Practices for Your Business offers tips and strategies to small business owners looking for ways to safeguard and strengthen their businesses. This webcast will provide informative, relevant and timely advice on how to implement and manage sound credit practices.
If you haven’t viewed a webcast before, it is like attending a seminar…from the comfort of your home or office. You simply watch online with both audio and video.
The webcast was moderated by Rich Sloan, co-founder of StartupNation.com. I’ve seen and admired Rich’s work for years, but was even more impressed when I met him in person. He’s both very smart and very funny. And I learned a lot working with the other panelists:
• Michael Billeci, Regional President, Greater Bay Area Region, Wells Fargo
• Scott Anderson, Ph.D. Senior Economist, Wells Fargo
• Jerry L. Mills, CPA, Founder and CEO, B2B CFO
• Sharon Evans, President and CEO, The Business Resource Group
Free registration for this webcast is now available at www.wellsfargo.com/biz/webcast.
About the Wells Fargo Small Business Webcast Series
Wells Fargo’s Small Business Webcast Series of interactive, online sessions is designed to help small business owners meet their business growth and management goals. The series, which launched in 2007, is one of Wells Fargo’s many resources to help small business owners succeed financially.
The latest addition to the library of small business resources in the webcast series is Sound Credit Practices for Your Business. The webcast series library also includes: Financing Strategies for Your Business, Protecting Your Business, Technology and Your Business, and Health Care Options for Your Business.
For more information on the series or to view one of these programs, visit www.wellsfargo.com/biz/webcast.
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Want your business to survive and thrive?
July 10th, 2008
By The XBanker
You may have heard the statistics that half of small businesses fail in the first year. The Small Business Administration says it’s not quite that bleak. They report that two-thirds of new employer establishments survive at least two years, and 44 percent survive at least four years. (Still that’s 54% that don’t make it four years.) These results were similar for different industries.
Major factors in a firm’s remaining open include an ample supply of capital, being large enough to have employees, the owner’s education level, and the owner’s reason for starting the firm in the first place, such as freedom for family life or wanting to be one’s own boss.
Other studies have pointed to the following causes of failure as… Read the rest of this entry »
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Do You Trust Your Banker?
July 3rd, 2008
By The XBanker
One benefit of being a bit of a packrat is that every once in a while you find a gem hidden in your junk. While digging through some files recently, for example, I came across a brochure from a law firm I had been saving for…well, let’s just say a while.
Titled, Words to the Wise: 10 Rules to Remember When Borrowing From a Bank by Cappello and McCann – now Capello and Noel — it describes precautions smart borrowers should take when getting loans. We’ll help warn you when we can.
I’ve asked their permission to share some of these tips and over the next few weeks I’ll do that. I’ll start by excerpting from Tip #10 – one of the most important:
Don’t ever forget that your banker’s allegiance is to his bank and not to you.
“Many people like to develop strong personal relationships with the people they do business with. They may foster close friendships with a loan officer or banker, especially in a small town where the branch manager knows everyone and there’s only one bank in town.
No matter who close you and your banker become, how many football games you go to together, or how many of his children he names after you, you need to remember that if it’s a choice between his head and yours, it will probably be yours. This is part of the unfortunately rule that you should not trust your banker; in other words, “Borrower beware.”
While the current trend favoring lenders may reverses itself, today courts are saying that lenders don’t have to deal fairly and honestly with their customers, and that they can strictly enforce all the terms of the small business loan documents no matter how onerous and no matter what the customers were told. While your bank may advertise itself as your “friend” and “trusted advisor” and your banker may assure you he is just that, lending is like any other business. It’s a dog-eat-dog world in the lending industry today, and you just might be your lender’s next breakfast.”
Cappello and Noel is one of the country’s top law firms when it comes to lender liability, so you know they have seen plenty of examples of lender-borrower relationships gone bad. You can’t forsee every problem, but you can be smart about shopping for a loan and head off some of them before they begin.
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Fast Cash For Your Business!
June 10th, 2008
By The XBanker
Do you need fast cash for your business? Want a small business loan with no personal guarantee? Are you looking for immediate business financing? Chances are that you answered “yes” to all three of those questions. We all want cash for our business and we want it as soon as possible. Unfortunately, the financing world doesn’t always tell us what we want to hear. If you are properly prepared and have a proven track record (as demonstrated by your revenues and your credit) you can probably get more money – and faster than you think. If you are not prepared … well, you reap what you sow.
Most people don’t start looking for capital for their business until it is too late. “Too late” can mean a lot of things: damaged credit, out-of-line ratios, too short of a time frame, etc. These oversights, plus the procrastinator’s itch for a quick fix, are two of the most common ailments we deal with. I wish every entrepreneur understood this truth: accessing capital is a process.
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Join Me for a Business Financing Strategies Webcast
May 29th, 2008
By The XBanker
Mark your calendars! July 29, 2008 will be the debut of Sound Credit Practices For Your Business webcast sponsored by Wells Fargo. I’ll be one of the panelists bringing you advice and strategies during the program.
Along with other top experts, we will be showing small business owners how to build and keep healthy personal and business credit, best practices for cash flow management, what banks are looking for in loan applicants, and strategies for creating a long-term plan for credit and business financing stability.
Registration for the event is now open. Did I mention it’s free?
I hope you’ll join us!
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Not All Industries Are Created Equal
May 27th, 2008
By The XBanker
When you are applying for a small business loan or unsecured line of credit at a bank, why do they ask you about your business’ industry? Does it really matter what type of business you run? If you have a history of business success, have stellar business and personal credit, an impeccable resume, and even an outstanding team behind you, the industry you are in shouldn’t play a role in the approval decision, right?
For better or for worse, the truth is that the industry you are in will play a fundamental role in the bank’s decision on whether to lend you money.
Each bank makes their own decision on which industries they “prefer” to lend to, which ones are a little “higher risk” and those that are “restricted”. Even though every bank writes their own rules, there are some generally accepted industry guidelines you should be aware of. The intent of this post is to explore these guidelines, and why banks make these distinctions.
The most basic principle of lending is that more approvals are a direct correlation to lower perceived risk. The more you have invested in your business, the less likely you will be to give up on that dream. Banks like to see you heavily invested! If there’s a discernable chance you will give up on your business in 2 months, your chances of getting some bank to lend you money is slim to none. If the bank determines that it is likely you will give your life for your business and do whatever it takes to make it succeed, then your chances of getting money increase. But what does this have to do with industry?
All banks have identified industries that they “prefer” to lend money to. These preferred industries are perceived to be lower risk. Most of these industries are professionals like Doctors, Dentists, Accountants, Attorneys, etc; people who have earned licenses and/or have gone to school for an insane number of years in order to pursue their business. If I had just graduated from college after 8 years of studying to be a dentist, what are my chances of quitting 2 months after I open my practice? Of course it’s possible, but it’s highly unlikely. Banks employ the same mindset. Generally, professionals have so much of themselves invested in their company, (time, money, etc), that they won’t give up when they hit their first obstacle. The nature of entrepreneurship is that we will inevitably have hard times; the chances of us and others in our industry sticking it out will ultimately determine what risk category the banks place us in.
Some “high risk” industries include Consultants, Investors, Real Estate Professionals, Financial related companies, etc. What does it take to be an investor or a consultant? The answer to that is absolutely nothing. It really doesn’t require one day of schooling or one penny (in most cases) to carry around a business card that says “Consultant”. Lenders understand this and that’s why these types of industries fall into the “high-risk” bucket. This doesn’t mean that banks won’t lend money to this group, because they dish out money every day to these industries – it simply means that the underwriting guidelines will be raised a bit from the “preferred” level. Instead of requiring 2 years in business for a preferred industry, the same bank might require 3 years. Or maybe the credit requirements will be 20-50 points higher. If you find yourself in the “high-risk” category, all hope is not lost; you just need to be a little more prepared before you ask the bank for money.
Each industry category could have hundreds of different types of businesses. I’ve given you only a few examples here to illustrate that not all industries are equal in the eyes of lenders.
Tip of the Day: You need to understand which industry bucket you fall into BEFORE you ask the bank for money. The steps you will take to get prepared for your loan or unsecured line of credit will be different depending on how risky your industry is. Remember, if you are declined for financing, you are basically shutting the doors to that particular lender for about 6 months. It’s better to take a few weeks or even a few months to make sure you are ready before the door closes.
So, how risky does your industry make you look?
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The Differences Between a Business Loan and a Business Line of Credit
May 5th, 2008
By The XBanker
Sometimes borrowers use the words LOAN and LINE OF CREDIT interchangeably, but these are in fact two different lending products. I’d like to call attention to some important differences between these two products in this post.
When a $50,000 LOAN is issued to a borrower, the lender expects the entire amount, plus interest, to be paid back in X number of years. When an applicant walks away from the bank after being approved for a LOAN, they usually have a check for the whole $50,000. Each month that a
payment is made, the loan balance decreases. Once the balance hits zero,nothing more is owed to the bank and consequently the bank has no additional obligation to reissue another loan to the borrower. The LOAN has been retired.
When a $50,000 LINE OF CREDIT (LOC) is issued to a borrower, the lender doesn’t expect the entire amount to be paid back at a certain time in the future. (This is usually the case – there are exceptions). When a successful LOC applicant walks away from the bank, they typically don’t
have a check in hand for the full amount; they usually have a checkbook or a credit card with a zero balance. The borrower doesn’t have to make payments on the LOC until they actually spend the money. If they spend the full $50,000 (or some lesser amount) to purchase some advertising for
their business, they are then obligated to start making payments to the lender, according to the LOC Terms.
The most important distinction between a LOAN and a LOC is if the borrower pays the balance down to zero on a LOC then they can spend the money again. If the borrower pays off a LOC a second time, they can continue to “dip in” as needed. It’s a cycle that could last for years as long as a good relationship with the lender is maintained. This is not the case with a LOAN.
There is a time and place where both LOANS and LINES OF CREDIT should be used in your business. If you need money for certain project or for a set period of time, you might want to consider a LOAN. Interest rates are typically more favorable with a LOAN. If you want some emergency money “just in case,” I’d definitely recommend a LOC. This way you don’t have to make monthly payments unless you use it; you don’t want to pay interest on money that isn’t being used. The key is having access to capital, not necessarily having it in the bank.
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Social Lending or Peer-to-Peer Lending
April 21st, 2008
By The XBanker
Here’s the truth: lenders care about risk – and so should they. Underwriting guidelines are 100% based on the principle of risk avoidance. It’s simple: the less risky you are perceived to be, the better your chances are of getting approved. The unfortunate truth is that with most banks, your “story” doesn’t play a part in the risk equation. You could be extremely gifted, passionate about your business, intelligent, and a proven winner in past ventures, but, unfortunately, non-tangible factors rarely help your case.
The Bank Lending Matrix doesn’t accept intangibles as data inputs, so these intangibles are neutralized at the banks.The only way to overcome this is to get your “numbers” in order. This means to take care of your personal and business credit score, build your business, create legitimate revenues, and wait until you have 1-2 years of history before you ask the bank for money.Waiting isn’t ideal for most entrepreneurs, since they need the money to get started.
A new and viable financing option is something referred to as social lending, community lending or peer-to-peer lending. Some of the most well know are Lending Club, Prosper, Zopa and Virgin Money (formally known as Circle Lending). With the exception of Virgin Money, these social sites are online platforms that allow a prospective borrower to tell his or her “story” when seeking a loan. If someone in the community likes what you say, they may choose to lend you money.Here’s an example, let’s assume you want to borrow $5,000. You don’t actually have to convince one person in the community to lend you the full amount – you just need to persuade 100 people to lend you $50 each (for instance).
Using Prosper as an example, Prosper takes the $50 from each of the 100 lenders (average Joes, not big banks) and issue you (the borrower) one loan. You only have to make one payment each month to Prosper. They manage the payment process and distribute the money to the 100 people. It really doesn’t get much easier than this!
I like this lending option, because the underwriting is not automatic and intangibles definitely play a factor in the decision to lend money. Just because your not dealing with the matrix, doesn’t mean that you get to take advantage of a bunch of pushovers – you might find that your peers are even more risk adverse than the banks! Nevertheless, social lending is a great alternative to the banking industry and might be a viable avenue for getting capital for your business.
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Business Plans and Bank Loans
April 15th, 2008
By The XBanker
The next time someone tells you to prepare a business plan for the bank, ask them when the last time was that they used a business plan to secure a loan.
The bottom line is that if you are doing less than $1m in revenue, you probably aren’t going to secure more than $100,000 from any one bank. This means that your lending approval will be driven by the Bank Lending Matrix, rather than some business banker carefully reviewing your financials.
So, before you burn a lot of time and money on a business plan, I recommend that you ask a couple of banks how your plan pertains to their process and what information they’ll need to see. Chances are, they’ll tell you just to fill out an application. But, don’t be suckered into applying for a small business loan unless you know you meet the approval criteria.
There are a number of reasons to create a business plan, but getting a bank loan isn’t one of them. Business plans can be great operational tools and help you think through your business. But, for start-ups and small businesses, you are either going to qualify for one the banks canned products or not. Plus, the banker who just wrapped up their BA in Sociology isn’t really equipped to dig into your financials. Banks hire social studies graduates for a reason, they’ve been trained to smile, nod and look interested. At the end of the day, they just want you to set-up a checking account and leave them alone to finish their game of solitaire. By all means, don’t take my word for it: ask your business banker and find out the truth for yourself.
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