Getting Business Loans - All You Need is the "3 C's"

Times are tough in the business world right now (no surprise to you if you follow the news). Banks are cutting back on start-up loans, which are the most risky a bank can undertake (along with those sub-prime mortgages), and the SBA seems to be restricting the number of loans it will guarantee through its popular 7(a) loan programs. But if you are prepared, and you have the "3 C's," you have a much better chance of obtaining that loan.

What Does a Lender Want?
The most important thing to remember about getting a business loan is that there are only three questions a lender wants to know:

• #1 How Much Do you Want?
  
• #2 How Will You Pay It Back?
  
• #3 How Can I Be Protected if You Don't Pay Me Back?

That's it. Couldn't be simpler. The trick is figuring out what the banker wants to see to answer these questions.

What Are the 3 C's? From my experience counseling small business owners, I have seen that there are 3 important items to prepare and provide, if you want your application to have a chance of succeeding. Here they are, in order of importance:

1. Credibility
   Your credibility is your ability to persuade your potential lender that your business can succeed. There are two elements to credibility:
   
   • A credible Business Plan, including great financials, to show you have the capability of showing a profit, so you can pay back the loan (remember #2 above).
     
   • A fantastic credit rating, because you are probably going to have to personally guarantee the loan, and the banker wants to know that you have a track record of fulfilling your financial obligations (remember #2 above, again).
   
   
2. Collateral.
   Collateral means having some funds you can pledge for the bank. In other words, they want a "down payment" or, as it is sometimes called, a "secured" loan. The bank wants you to share in the pain if your business fails. So they want you to put your personal funds (for a start-up) or business funds (like savings accounts) on the line. Some banks want 100% down. This doesn't mean they want you to provide 100% of the funding; if you could do that, you wouldn't need the loan. But they want some kind of assets you can pledge. If you don't have the assets, the bank may require you to have a co-signer; that is, someone who has assets to pledge against the loan. You may be able to get an SBA-backed loan, in which the SBA can serve as your co-signer (sort of), to satisfy the bank's need for collateral.
   
   
3. Capital (Assets)
   Bring a list of your business assets that you can use as security for the loan. Capital is the most difficult for a new business, because new businesses don't have equipment and facilities yet; that's why they need the loan, to purchase this stuff. If you have capital assets that you can contribute to the business, it may help secure the loan, particularly if you are expanding or adding inventory for an existing business. Just remember that capital assets are valued at market, not at what you bought them for, and depreciation reduces the value. So if you bought a piece of business five years ago for $25,000, the bank isn't going to give you $25,000 for it, since its fair market value is likely to be much less than $25,000. That's why capital is less valuable to a bank than credibility and collateral.

   So being prepared before you go to a bank with the 3 C's:
   

   • Credibility, in the form of a business plan and personal financial documents
     
   • Collateral the bank can use to secure the loan, and
     
   • Capital assets to provide additional security
   
   can give you a much better chance of getting that business loan, even in tough financial times.