What are the three `c's`?
Traditionally bankers look at what are
called the three `c's`: character, credit and collateral. Character means more
than not having a criminal record. It means that the banker feels confident that
you are not going to suddenly disappear for parts unknown if the business runs
into trouble. Specifically bankers like to see ties to the community such as
long residence, family ties, and home ownership. A clean credit history is
important. A couple late credit card payments shouldn't be a factor, but missing
mortgage payments for three months in a row will require a good explanation.
Bankers like good character and good credit, but they live for solid collateral.
Equipment, buildings and trucks--that's the kind of stuff that bankers really
like for collateral--solid value and likely to be worth a lot even if the
business goes bust. Inventory, raw material and goods are second choices for
collateral--they will lose their value more quickly than fixed assets but still
be worth something.
Can you get a business loan?
The criteria for business loans varies
much more widely than for consumer loans and often varies quite a bit from one
banker to the next at even the same bank! However here are some rules of thumbs
to give you an idea of your chances of getting a loan.
Getting a loan for a new business is tough
Fixed assets such as machinery or buildings can almost always be financed
Current assets such as inventory or goods in process increase your loan
chances
2+ years of profitable operation greatly increases your loan chances
The larger the owner's investment in the business the better your chances of
getting a loan
Loans to small corporations will often have to be personally guaranteed by a
shareholder
It is difficult to get loans to offset operating losses
It is usually possible to get a loan to modestly expand a profitable
business
How to get the bank's money, even when the bank says `no!`
Banks
have much more lenient standards for lending to consumers than to businesses. So
what you can do is borrow the money from the bank as a consumer and then turn
around and personally invest the funds in your business. Just make sure that you
never lie how about you are going to use the proceeds on a loan application. For
example you could apply for a home equity loan to tap any available equity in
your house. Then take the funds and invest them in your business. The bank feels
safer because their statistics show that home equity loans or much more likely
to be repaid than loans for brand new businesses. No equity in your home? Maybe
you can get a car loan?
Getting an appointment with a bank
Don't just show up in
person--first make an appointment by phone. Ask the receptionist in the bank or
the loan department for the name of the appropriate person who would handle your
loan request. Of course it would be better, but not necessary, to get a referral
from a friend or advisor such as your lawyer or accountant. When you get the
name of the appropriate loan officer simply ask for an appointment. Don't offer
any more details over the phone, unless the loan officer requests them. The more
details you offer over the phone, the greater the chances you won't get the
appointment at all. Sound confident. Sound matter of fact. Sound like you don't
even need the money... that's the kind of person that loan officers like to lend
to.