SOME THINGS YOU NEED TO KNOW ABOUT BANKS & SMALL BUSINESS
Some Banks are really looking for your business if you are a small fry, others are not. It would be a good idea for you to look for those which have special programs for small business or that at least advertise the fact that they are Small Business Administration Lenders.
Banks that do have a program for small business usually rely on the character and credit history of the borrower or owner of the business asking for the loan. These programs are usually limited up to a maximum of $50,000. The same can be said about low-doc Small Business Administration loans.
Do not dismiss Commercial Community Banks as a source of financing just because people say that you will be turned down. Prepare a good package, take it to a Bank with an advertised small business program, and if you get turned down it will probably cost you nothing, and you will be wiser for the experience.
If you get turned down, talk to the officer about it, and see if you can provide what he is asking for. Remember that you getting turned down from one Bank does not mean that the next one will turn you down also.
Make sure that you have set up your business properly. If you call your business a Corporation, it has to be registered with the state. If you live in Florida you can contact The State of Florida Corporations Online for the necessary forms. Make sure that your business has its own FEI, which is the Tax ID for business. If you work under a fictitious / DBA name make sure it is registered also, in Florida this is done through The State of Florida Corporations Online also.
Smart Banks do not lend based on the value of the collateral that you can pledge. They know that it does not matter that Grandma is willing to mortgage her house in order for you to get a loan. If your business does not cash flow to repay the debt, it does not matter that the house is worth twice as much since you are not going to be able to pay the loan back.
A lot of Small Business Loans are secured by a Universal Commercial Code Lien on all or part of the corporate assets. This means that in case of default or bankruptcy the secured party "The Lender" gets those assets.
Other ways to secure the loan include mortgages on the personal residences of the owners, an assignment of accounts, assignment of stocks/bonds, gold bullion, practically anything of value.
If you do not own any tangible collateral but have a nice relative that is willing to pledge something of value to secure the facility this can be arranged through a hypothecation agreement (Ex: Grandpa has 1,000 shares of IBM stock in his safe at home, he does not want to sell the stock and give you the money, but he trusts you and is willing to pledge it) remember that once the stock is pledged, if you default on your loan the Bank will take your Grandpa's stock.
If you want more information on how your Bank will dissect your application and financial information follow this link to my Credit Analysis Page.
Requirements for a small business package vary from Bank to Bank, on the average your loan officer will require the following:
1. A completed Loan Application where you will put down your request, your desired terms, your business information, personal information about the owner(s) etc.
2. Three years of Corporate Financial Statements (Basic Financial Statements are comprised of a Balance Sheet & an Income Statement), your Bank might require less than three. I have seen programs where one was enough, and the borrower was allowed to use the ones included in the Corporate Tax Return. As with anything else required remember that more is better. If you can provide three that would be great.
3. Three years of Corporate Tax Returns
4. A Personal Financial Statement for the owner(s). Usually Banks require that anybody with at least a 20% stake in the business guarantee the loan. After all if you are not willing to back the business with your own money do not expect the bank to do it.
5. Three Years of Personal Tax Returns for the owners / guarantors.
6. Articles of Incorporation. (This is the laws that regulate your Corporation, you must have received a copy at the time you incorporated the business)
7. Corporate Resolution of authority. (This is a form that tells the Bank who is allowed to sign on behalf of the Corporation).
8. Occupational License. Issued by the State or City.
9. Information about any property, bank account or asset that you might be willing to pledge to secure the facility. Most Banks will require a tangible asset as security for most loans above $100,000. This does not mean that there are not any loans for $500,000 that are secured by only a Universal Commercial Code Lien, but your financial status or that of your company must be substantial for that type of preferred treatment.
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