Read Start Your Own Business Online
Authors: Inc The Staff of Entrepreneur Media
Start Your Own Business (35 page)
Once you’ve established a relationship with a banker, it is simple to expand your circle of friends at the bank. Every time you visit, spend some time meeting and talking to people, especially those further up the ladder. Often, the bankers will be the ones to initiate contact. Take advantage of this opportunity. The more people you know at the bank, the easier it will be to get the next round of financing.
READ THE FINE PRINTH
allelujah and yippee! You can almost hear the choirs of angels singing as your banker smiles and hands you the loan documents. You got the loan!Not so fast. Before you sign that piece of paper, take a good look at what you’re getting into. Many entrepreneurs are so excited about having their loans approved, they fail to read the fine print on their loan agreements. That can lead to trouble later on.It’s a good idea to get the loan documents ahead of time so you have a chance to review them for a couple of days before you sign, according to the American Bankers Association. Bankers won’t have a problem sending advance copies of the documents but will generally do so only if they’re specifically asked.Most bankers will be happy to help you understand the fine print, but it’s also a good idea to have your accountant and lawyer review the documents, too.Although it varies slightly from bank to bank, a small-business loan package usually consists of several documents, typically including a loan agreement, a promissory note and some form of guarantee and surety agreement.•
Loan agreement
. This specifies, in essence, the promises you are making to the bank and asks you to affirm that you are authorized to bind your business to the terms of the loan. Most banks require you to verify that all the information on your loan application is still true before they disburse the loan.•
Promissory note
. This details the principal and interest owed and when payments are due. It outlines the events that would allow the bank to declare your loan in default. Knowing these events ahead of time can help you protect your credit record. Look for “cure” language in the default section. A cure provision allows you a certain amount of time (usually 10 days) to remedy the default after you’ve been notified by the bank. If such a provision isn’t included, ask if it can be added to prevent you from defaulting accidentally (in case a payment is lost in the mail, for example). Also make sure you understand what the bank can and can’t do after declaring default.•
Guarantee and surety agreement.
Because startups generally have insufficient operating history or assets on which to base a loan, banks usually require the loan to be guaranteed with your personal assets. The bank may ask you to secure the loan with the equity in your home, for example.
chapter 15
FED FUNDS
How To Get Government Loans
W
here can you go when private financing sources turn you down? For many startup entrepreneurs, the answer is the U.S. Small Business Administration (SBA). The federal government has a vested interest in encouraging the growth of small business. As a result, some SBA loans have less stringent requirements for owner’s equity and collateral than do commercial loans, making the SBA an excellent financing source for startups. In addition, many SBA loans are for smaller sums than most banks are willing to lend.
here can you go when private financing sources turn you down? For many startup entrepreneurs, the answer is the U.S. Small Business Administration (SBA). The federal government has a vested interest in encouraging the growth of small business. As a result, some SBA loans have less stringent requirements for owner’s equity and collateral than do commercial loans, making the SBA an excellent financing source for startups. In addition, many SBA loans are for smaller sums than most banks are willing to lend.
Of course, that doesn’t mean the SBA is giving money away. In fact, the SBA does not actually make direct loans; instead, it provides loan guarantees to entrepreneurs, promising the bank to pay back a certain percentage of your loan if you are unable to.
TIPWhen seeking an SBA loan, choose your bank carefully. Not all banks are versed in SBA loans, so look for one that is experienced.
Banks participate in the SBA program as regular, certified or preferred lenders. The SBA can help you prepare your loan package, which you then submit to banks. If the bank approves you, it submits your loan package to the SBA. Applications submitted by regular lenders are reviewed by the SBA in an average of two weeks, certified lender applications are reviewed in three days, and approval through preferred lenders is even faster.
The most basic eligibility requirement for SBA loans is the ability to repay the loan from cash flow, but the SBA also looks at personal credit history, industry experience or other evidence of management ability, collateral and owner’s equity contributions. If you own 20 percent or more equity in the business, the SBA asks that you personally guarantee the loan. After all, you can’t ask the government to back you if you’re not willing to back yourself. The SBA offers a wide variety of loan programs for businesses at various stages of development. Here’s a closer look:
7(a) Guaranty Loan ProgramFOR WOMEN ONLYW
omen business owners have a friend in Washington: the Office of Women’s Business Ownership (OWBO), part of the SBA. The OWBO coordinates federal efforts that support women entrepreneurs through business training and technical assistance, and by providing access to financing, federal contracts and international trade opportunities.In addition, the office directs Women’s Business Centers in all 50 states. Women’s Business Centers provide assistance, training and business counseling through the SBA. For information about OWBO services, call (800) U-ASK-SBA or visit
sba.gov
.
The primary and the most flexible SBA loan program is the 7(a) Loan Program. The SBA does not lend money itself, but provides maximum loan guarantees of up to $2 million or 75 percent of the total loan amount, whichever is less. For loans that are less than $150,000, the maximum guarantee is 85 percent of the total loan amount. SBA policy prohibits lenders from charging many of the usual fees associated with commercial loans. Still, you can expect to pay a one-time guaranty fee, which the agency charges the lender and allows the lender to pass on to you.
A 7(a) loan can be used for many business purposes, including real estate, expansion, equipment, working capital and inventory. The money can be paid back over as long as 25 years for real estate and equipment and 10 years for working capital. Interest rates vary with the type of loan you apply for.
BUSINESS 101W
orried your business acumen isn’t as sharp is it could be? Wishing you had taken an accounting class instead of that film history course on John Wayne? Then the Small Business Training Network might be for you.The Small Business Training Network is an internet-based learning environment—functioning like a virtual campus. As its website says, it offers online courses, workshops, information resources, learning tools and direct access to electronic counseling and other forms of technical assistance.The classes run the gamut from how to start your own business—with titles like “Franchising Basics” and “Technology 101”—to how to prepare a loan package, develop employees and plan for retirement. The workshops are self-paced and usually extremely topical. Some classes were developed within the SBA, while others have been developed by academic institutions. For more information, log on to
sba.gov/training
.
A general 7(a) loan may suit your business’s needs best, but the 7(a) program also offers several specialized loans. One of them, the SBAExpress Program, promises quick processing for amounts less than $350,000. SBA Express can get you an answer quickly because approved SBAExpress lenders can use their own documentation and procedures to attach an SBA guarantee to an approved loan without having to wait for SBA approval. The SBA guarantees up to 50 percent of SBAExpress loans.
CAPLinesFor businesses that need working capital on a short-term or cyclical basis, the SBA has a collection of revolving and nonrevolving lines of credit called CAPLines. A revolving loan is similar to a credit card, with which you carry a balance that goes up or down, depending on the payments and amounts you borrow. With nonrevolving lines of credit, you borrow a flat amount and pay it off over a set period of time.
CAPLine loans provide business owners short-term credit, with loans that are guaranteed up to $2 million. There are five loan and line-of-credit programs that operate under the CAPLines umbrella:
1.
Seasonal line of credit
: designed to help businesses during peak seasons, when they face increases in inventory, accounts receivable and labor costs
2.
Contract line of credit
: used to finance labor and material costs involved in carrying out contracts
3.
Standard asset-based line of credit
: helps businesses unable to meet credit qualifications associated with long-term credit; provides financing for cyclical, growth, recurring or short-term needsSBA Loan Document ChecklistDocuments to Prepare for a New Business• Your SBA loan application form• Your personal history statement with your resume and accomplishments and the resumes of key managers you plan to employ• Statement of your investment capabilities• Current financial statement of all personal liabilities and assets• Projection of revenue statement• Collateral listDocuments to Prepare for an Existing Business• Balance sheet• Profit and loss statements• Income statement of previous and current year-to-date incomes, including business tax returns• Personal financial statement with each owner itemized, including personal tax returns for each owner• Collateral list• Your dba or incorporation paperwork• Copy of your business lease• Loan request statement describing business history, loan amount and purpose
4.
Small asset-based revolving line of credit
: provides smaller, asset-based lines of credit (up to $200,000), with requirements that are not as strict as the standard asset-based programEXPORT EXPERTISEI
f exporting is part of your business game plan, the Export-Import Bank of the United States (Ex-Im Bank) can be your biggest ally. The Ex-Im Bank is committed to supporting small exporters and provides many financing tools targeted to small businesses, such as working capital guarantees and export credit insurance.With a working capital guarantee and credit insurance, small businesses can increase sales by entering new markets, expanding their borrowing base, and offering buyers financing while carrying less risk. Often, small exporters do not have adequate cash flow or cannot get a loan to fulfill an export sales order. The Ex-Im Bank working capital guarantee assumes 90 percent of the lender’s risk so exporters can access the necessary funds to purchase raw materials or supplies to fulfill an export order.The export credit insurance protects an exporter from buyer payment default and also allows exporters to extend credit to their international buyers.To be eligible for the Ex-Im Bank’s programs, U.S. exporters must simply meet the Small Business Administration’s definition of a small business and have export credit sales of less than $5 million. Business owners can contact the Ex-Im Bank directly at (800) 565-3946 or through any commercial lender that works with the agency (see the Lender Locator at exim.gov). Based in Washington, DC, the Ex-Im Bank also has regional offices in Chicago, Dallas, Houston, Miami, New York City, and Orange County, San Diego and San Francisco, California.
5.
Builder’s line of credit
: used to finance labor and materials costs for small general contractors and builders who are constructing or renovating commercial or residential buildings
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