Financing – Bank Loans
A loan from a private lender is one option for financing a business. A bank will assess the business proposal and use established underwriting guidelines to determine eligibility for a loan, necessary collateral requirements and will usually require a personal guarantee.
To apply for a bank loan, take some time to prepare a business plan. The process of completing the plan will help better define the project and the financing needed. Banks like to receive a business plan that includes information on the business, the market served, financial projections and the credentials of the borrower. Financial projections are important for a new business as well as an existing business. Banks will complete a credit analysis using the financial information provided and determine if there is cash flow from the business to make the payments on the loan.
The loan plus interest is usually paid back in fixed monthly installments over a predetermined number of months or years. Real estate loans will usually have an amortization of 15 or 20 years. Equipment loans may be 5 or 7 years and lines of credit usually have to be renewed annually. Fixed assets such as machinery or buildings can be financed and will be used as collateral for the loan. Working capital is more difficult because tangible collateral may not be readily available. Working capital loans or lines of credit may be collateralized with accounts receivable and inventory. In nearly all business loans, the banker will expect the borrower to contribute equity. This is typically 20% or the project costs, but will vary depending on the project.
A banker will require collateral for the loan. This may be the real estate or equipment being financed, or it may be personal assets of the borrower. Bankers are very likely to require a personal guarantee that commits the borrower to pay back the loan even if the business fails. Bankers evaluate a loan application by looking at the four `c’s` of credit: character, credit and collateral and capacity. Bankers may look at resources to mitigate their risk including the Small Business Administration guarantees, state and local revolving funds and ‘gap’ financing programs.