Business LoansBy Beau Fannon
The history of business loans
My understanding of history is not certain. Neither is the history of business loans. The first I heard of loans was in vacation bible school. Pine Grove Missionary Baptist Church in Ragtown, Arkansas, isn’t listed on any map. There I learned that Deuteronomy 23:19-20 said you shouldn’t charge interest on loans to your family, but charging interest to a foreigner was encouraged. And Matthew 21:12 said Jesus turned over the money changers tables in the Temple. My eight year old brain translated all of this into Jesus made banks to charge the Romans interest.
A quick web search reveals that the actual history of money lending isn’t that far off from my childhood understanding. Civilizations created wealth. Wealth was stored in temples. Priests made loans to farmers, traders, and governments. Eventually wealthy families in Italy got tired of taking loans from Catholic priests, and the first modern bank was born in the 14th century.
A loan works by making a promise to achieve a long-term goal in exchange for resources immediately. Both parties involved need to profit. A business profits by taking the bank’s money upfront and increasing its productivity. A bank profits by earning interest on its loans that the businesses with greater productivity can afford to pay.
Business loan uses
Business bank loans are the least risky long-term financing option available to businesses. Business bank loans are also the most underutilized financing option available to small business owners. Check out this infographic I found at YoungUpstarts.com
Do not take out a business loan to buy short-term supplies you will consume in 30 days. Take out a business loan to buy heavy-duty equipment that turns inventory into sellable goods. Or take out a loan to buy the building to house the equipment. Or take out a loan to cover the working capital you need to service your short-term debt obligations during a transition phase. Or use a loan to refinance a prior debt obligation which has less than favorable repayment terms. Equipment, owner-occupied real estate, working capital, and debt refinancing are situations where you should consider business bank loans.
Business loan requirements
To get a traditional business loan, you’ll need to prepare these 5 items far in advance:
1. Good Personal Credit
If you are a small business, your personal credit will get checked. There are hundreds of tutorials on how to improve your personal credit. Expect it. Perfect it.
2. Good Business Credit
A business needs good credit to be considered for a business loan. However this isn’t as straightforward as it used to be. SBSS, liquid credit, and D & B will all be covered future blog posts. You need to know this stuff so you look good during a bank loan review process.
3. Use of Funds Explanation
This is a great place to hit up the community benefit of the loan. How many jobs will be created? How many lots in a blighted neighborhood will be revitalized? Everyone likes a feel-good story. If you merely need the loan to cover systemic cash flow shortages, your odds of getting a traditional bank loan are severely diminished.
4. Cash Flow
Since banks rarely finance 100% of a project, you need to demonstrate the ability to cover the down payment and the repayment plan. It can be difficult to determine future cash flows, so don’t be surprised if the bank discounts your projections. One situation that banks will likely agree with you on is cash flow projections during a debt obligation refinance. If you have a merchant cash advance that is costing you $3,000 a month, and the loan will only cost you $300 a month, everyone will see the future cash flow benefit.
5. Large Asset Base
Without assets, you don’t have collateral. Without collateral, a business loan can’t be secured. You have to have assets. If your business rests solely on the skills and knowledge you possess, you will struggle to get a loan. Again, don’t be surprised if the bank discounts the value you place on your assets.
What to do when you get rejected
Contact AJFI. We can work with you to figure what happened, how to improve your financial position, and move forward.