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How to obtain commercial loans for start-up businesses and for expansion plans

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 good credit risk.

Banks look for specific criteria as bare minimum requirements before even considering lending 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% to 90% 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. Read more information about the steps required to prepare your "business plan". Our firm also highly recommends using the excellent software by
Business Plan Pro” which is probably one of the best on the market.

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% of the needed capital. Banks simply won't take a risk when the business owner has not.

We presume that you have some accumulated financial assets based on your previous investment strategies, and we have found that producing some record or information of your past investment dealings, produces positive results. Our advice on solid investments guidelines is covered on our web page, read more

Good credit history

As 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 loan application. Some of the most common credit reporting agencies includes Equifax, or Trans Union, and Experian. If you have had problems with your credit in the past, we recommend that you research on how to rebuild a good credit rating click here

Strong character

A bank considers such intangibles when estimating character, as prior business experience and existing or past relationship with the lender, and references from professionals such as accountants, lawyers, and business consultants who have reviewed your business plan. Additionally the care and effort you put into the business-planning process suggest your passion, persistence and level of commitment.

This is a positive step

It's comforting to know that funding from the government has actually increased the ability of start-ups to obtain commercial loans. The objective of these programs is to assist businesses that can't get a loan elsewhere. The direct-loan program requires, depending on capitalization size, or the area of the business, and one or two rejections by banks as a prerequisite. Some funds are actually Grants and Free Money for qualified applicants.

Both large and small financial institutions, and several non-bank entities in the Rocky Mountain region of the USA, actually fight over business when you apply for a SBA loan. The opportunity to finance SBA loans are made under its "guaranteed loan program", banks do not lose as much money if you fail to repay your loan. What funds are available?

In order to obtain an SBA loan, the business submits a loan application to a lender {usually a bank, but increasingly a non-bank entity}. If the lender approves the business submits the application to the SBA. If the SBA approves, the private lender makes the loan, which the SBA can guarantee up to a maximum of $750,000. Visit our page outlining the sources for commercial loans.

Next Level Up

A leading cause of business failure is insufficient capital. Even after obtaining an initial commercial loan, you will need to devote considerable attention to attracting the capital necessary for a local, regional, national or international launch. In preparation for seeking additional funding, continue to refine your business plan. Also build on the requirements that enabled you to obtain you initial commercial loan; ability to repay, solid business plan, extensive personal investment in the company, good credit history, and strong character. If you needs further advice or assistance contact us.

This material was adapted from an article in the Utah Business magazine


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