Fetching Funds.

• Author: Christensen, Annette Colton
• Position: Obtaining commercial loans - Brief Article

Banks make money by lending money. However, the financial inexperience of many hopeful new business owners often dissuades banks from granting them a commercial loan. Requesting a loan when not properly prepared conveys to the lender that you are a high-risk borrower. To successfully obtain a loan, you must be prepared and organized. You must know exactly how much money you need, why you need it, and how you will pay it back. You must be able to convince your lender that you are a good credit risk.

Ducks in a Row

Banks look for specific criteria as bare-minimum requirements before even considering loaning to a start-up company. Often, a bank will consider the following:

Ability to repay. To ensure a start-up owner's ability to repay a commercial loan, a bank might require collateral of nearly 85 percent to 90 percent of the loan value. In a start-up business, a commonly used source of collateral is the equity value in real estate, such as your home. Other possible collateral sources are inventory, accounts receivable, equipment and securities.

Solid business plan. A business plan generally contains a description of the prospective business operations, competition, management ability, marketing efforts, and financial projections for three years, including a cash flow projection and personal balance sheet demonstrating the worth of the business. A business plan also identifies for the lenders your anticipated goals and also serves as a resume for the owners and management team of your start-up.

Extensive personal investment in the start-up. Personal assets of the founders are usually the initial source of financing. Savings accounts, loans or mortgages collateralized by equity in the family home and auto, marketable security investments, and loans on cash surrender values of insurance policies are among the available personal resources. Banks expect start-up businesses to risk their own funds in the beginning, asking, at the very least, that businesses provide 25 percent of the needed capital. Banks simply won't take a risk when the business owner has not.

Good credit history. As a start-up, you must justify your ability to make periodic installments on a loan. Start-up founders with a shaky credit history, either personally or professionally, have little chance of acquiring a loan. Obtain your own credit report before applying for a loan so there are no surprises. If there are any inaccuracies or problems, address them before submitting the...