Loans Feed off Positive Gains
October 16, 2011
Business Tips Article
ASU-SBDC Business Development Specialist
SAN ANGELO, Texas — After attending the “Access to Capital” seminar hosted by the ASU-SBDC last week, it became clear to me that lenders in San Angelo and the Concho Valley really want to help potential and existing small businesses with capital.
The country is still in an economic downturn and it is more difficult, but finding credit is still possible. An institutional banker who works with lenders across the country said, “Regulators have gotten so afraid (of) bad loans that we leave many good loans on the table.”
When reviewing an applicant, lenders want to see positive growth. In 2009 it was virtually impossible and they are willing to forgive that period, but sales and profits need to have been moving upward since then. Unfortunately, many small businesses cannot show an uptick in business.
Many lenders will be unforgiving on a loan that does not meet their criteria, but some local and community banks are willing to be creative and work hard to get the loan approved, particularly those that have experience in your industry.
Banks are driven in large part by its rating from its supervisory authority.
They are then graded, and scores determine how much a bank must put aside on its balance sheet for each loan it makes and the amount of scrutiny from regulators.
For those who are seeking capital to purchase a business or fund a startup, lenders like to see two to three years of experience in the industry and inject their own money into the project.
Let’s say you are asking for a $300,000 loan. The bank will require the borrower put in up to $100,000 of his or her own cash into the business venture. Also, showing that customers already exist for the product
or service will help.
“For those seeking leverage to fund a new business, it’s often easier to acquire credit to buy an existing business that has an established customer base than get a loan for a new startup venture,” said Rohit Arora, Biz2Credit’s co-founder and chief executive.
Lenders use the FICO (Fair Isaac Corporation) score to determine credit worthiness. As a tool that is influenced by consumer credit cards, a borrower using 10 cards regularly who makes minimum payments on the balances will have a better FICO score than a responsible borrower who uses two cards, but pays the balance in full each month.
Banks want to make sure you will pay them back. They will want to see a record of making enough profit to cover expenses, interest and principal payments, and have some in reserve for when things do not go as planned.
They also will favor borrowers who have access to capital in the event the business is not successful.
Include the rental property you own, or income from a spouse who works outside the business into your business plan.
“Business Tips” was written by Paul Howard, business development specialist and Certified Business Adviser IV of Angelo State University’s Small Business Development Center. Contact him at Paul.Howard@angelo.edu.