| Things You Should Know Before Borrowing Money |
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HomeBusiness Journal
By A. Barry Cappello
Whether your home business is just getting off the ground or needs an infusion of capital for expansion or new equipment, applying for financing is not as easy as it once was. Besides a more cautious economy, the multitude of bank mergers have eliminated competition and made it more difficult to establish a rapport with your local lender.
Successfully securing a business loan means you must convince the lender that your business has all the right ingredients for success. On the other hand, you must be sure your lender has the qualities and the financial stability to meet your business financing requirements.
Making Your Pitch
Before agreeing to lend thousands of dollars or more to a small business, lenders want every reassurance that the money will be repaid. Before contacting prospective lenders, you will need to put together a persuasive packet of information on yourself and your company that will convince a banker to lend you money. The packet should put your company in the best possible light. According to the U.S. Small Business Administration, it should include:
• A detailed description and history of your business, its products or services and how the company operates:
• Financial statements for three years (for existing businesses):
•Schedule of term debts (existing businesses):
• Aging of accounts receivables and payables:
• Projected opening-day balance sheet (new business):
• Lease details:
•Amount of investment in the business by the owners:
• Projection of income, expenses and cashflow:
• Signed personal financial statements and personal resumes of key management:
In addition, you will want to show how the loan funds will be used and how the loan will be repaid.
Expect the lender to contact at least one of the three credit reporting agencies:
• Experian - www.experian.com - (888)-EXPERIAN;
• TransUnion - www.transunion.com - (800) 888-4213; or
• Equifax - www.equifax.com - (888) 202-4025) to request a business credit report on your existing company (or a personal credit report if your company is a start-up).
Review the reports and correct any inaccuracies before applying for a loan. Knowing your credit status before loan negotiations begin is important. An excellent credit rating should give you the confidence push for the lender’s best rates. If you have less than sterling credit you will be negotiating at a disadvantage.
Finding the Ideal Lender
The ideal lender will be one that actively seeks out small business loans. Small locally-run banks are your best bet. Lenders that already lend to your size business or to businesses in your trade or industry are the most attractive.
While interest rates, loan terms, fees, and available financial services and options are important, how a prospective lender views small business loans or your particular industry is equally important. Spend some time on the telephone with a prospective lender to learn if it lends to small businesses. If it doesn’t, don’t bother trying to convince it to do otherwise. Lending criteria is typically rigid and the loan officer does not have the authority to override bank policy.
Ask other small companies in your area where they bank and get recommendations. If you keep hearing horror stories about a particular bank, stay clear of it no matter how attractive its interest rates and loan terms. Will the lender consistently have money available to you when needed? Is it willing to extend credit on an emergency basis? Is it willing to take time to learn about your business and accommodate any seasonal or cyclical financial needs you typically encounter? Target banks that consistently receive high marks from other small business owners.
Negotiating The Loan
Let’s say you have found a lender that has looked over your presentation packet and is willing to extend credit. You may be so happy that a bank has accepted your loan application, you may not pay much attention to the small print contained in the loan documents. But before signing on the dotted line of the loan agreement, read and understand everything the loan papers say. Lenders have toughened up their lending documents considerably over the past several years because of fear of litigation.
As simple as it sounds, make sure the loan documents accurately reflect your understanding of the loan agreement. If a dispute later arises between you and the lender, both sides will turn to the loan papers to clarify the issue. If the disagreement ends up in court, the court will only care about what is contained in the loan documents.
If a clause in the loan papers makes you uncomfortable and the loan officer says not to worry, “it’s only boilerplate,” it’s time to worry. Verbal promises and assurances rarely hold up in court. If the verbiage is not exactly your understanding of the loan arrangement, don’t sign the papers thinking the wording can be corrected later or that the bank won’t enforce what is in the document. Be firm on this. Once you sign the papers, the bank is under no obligation to change them despite what the loan officer may have verbally promised you.
Pay close attention to the worst-case scenarios included in the loan documents. If your company is 30 days late on a payment, can the bank immediately foreclose or seize your collateral as it might state in the loan agreement? Negotiate to be notified in advance of any foreclosure or seizure of collateral. You may not get your banker to change the fundamental terms, but at least you will have warning of what is to come.
You also need to look for jury trial waivers and mandatory arbitration clauses in the documents. More and more lenders are including these clauses so whenever customers sign loan documents, they automatically agree to forfeit their right to a jury trial if a disagreement arises with their bank.
Mandatory arbitration clauses are beginning to take heat in the courts, but they are still being included in loan agreements. By signing a loan agreement that includes a mandatory arbitration clause, you are giving up a fundamental constitutional right to a trial by jury. Banks would much rather take their chances before an arbitrator (whom they may have worked with in the past) than with an unknown jury. While it may be next to impossible to remove these clauses, you can at least be aware of them.
To help avoid misunderstandings during the loan process and to avoid future disputes, document all telephone conversations and in-person meetings with follow-up correspondence to the lender. This practice should be standard with all interactions between you and your lender during the life of the lending relationship.
By following these guidelines you and your company should be able to select a financially solid bank for your lending needs. Never take your lending relationship for granted.
Unfortunately, with bank mergers still a fact of life, small business owners run the risk of having their friendly neighborhood bank bought out by a giant conglomerate. The bank may introduce new personnel or new lending practices that do not fit your needs or it may decide that it no longer wants to lend to small businesses or businesses in your industry. If there is a change in bank ownership, your first move should be to arrange a meeting with your loan officer to learn how your company may be affected.
You must continue to be vigilant in protecting and maintaining your borrowing rights and interests long after the loan is funded.
© Steffen Publishing Co. All rights reserved.
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