Obtaining Credit

Obtaining Credit

The number one factor in obtaining any kind of credit facility is the ability to show the capacity of your business to repay. If you can’t show the ability to repay, you will not obtain financing. With the exception of cash collateral, collateral will not help without the capacity to repay. Banks are not in the business of liquidating collateral. Collateral is always secondary to the ability to repay. If you cannot produce financial statements (usually three years worth) or well thought out and defensible projections for new and young businesses, then you are fighting an uphill battle. Remember, that banks are lending depositor money and have a fiduciary responsibility to their account holders to lend wisely. They are in the business of risk management. The statement “I know I can repay it!” is not convincing to a lender.

Once you have your plan to present to a lender, make sure you choose the right type of lender. Most small business are used to dealing with the branch manager where they make their deposits. If your request is relatively small one (up to $50,000.00), the branch manager may be able to help you. Larger loans will require more expertise, and you want to ask for a small business lender. Whichever you pick, ALWAYS make an appointment to meet with them. Loan requests usually require a good bit of time and the lender needs to block out enough time to meet with you and allow you to make your case and for them to ask questions. Even though you may have your documents and business case ready, when making your appointment, let them know what kind of loan you are seeking, and then ask what documentation they would like you to bring. This can vary from bank to bank. It is always good to have what they require for the first meeting.

Remember, preparation and choosing the right lending officer is key. If you can’t support your loan request with the ability to repay and a sound business case, then the lender will not be inclined to view your request as a viable risk of depositor.

Credit Facilities

Revolving Lines of Credit (LOC) - LOCs are typically used to finance short-term credit needs like inventory purchases. These inventory purchases are then sold for a profit and the LOC is paid down on a short-term basis. They can also be used to fund short-term cash flow needs, like a payroll, where funds are in the process of being collected from sales, but not yet in the bank. A typical LOCs balance will go up and down throughout its life. Some lenders may require that the LOC be paid to zero at least once during its term. LOCs should not be used to purchase equipment, rolling stock, or other long-term assets. LOCs are usually underwritten for a short period of time, a year or less. They are then reviewed for renewal. LOCs can be secured by collateral or unsecured.

Term Loans:  Term loans are used to purchase equipment, rolling stock, and other fixed assets. They are paid on a monthly basis, usually a fixed payment. Terms can range from 24 - 72 months, depending on the type of asset being purchased. Depending on your business, down payment requirements can range from 0 - 25%, and in some cases more.

Commercial land/building loans: Loans to purchase unimproved land (no structure) range in terms from 5 -10 years. This can vary from lender to lender. Payments are usually fixed from month to month. Down payment will typically range up to 30%. Commercial land and building loans are similar in structure to land only loans. Terms will typically range from 5 - 15 years, some times 20 years. Down payments can range up to 30%.

Construction loans: Construction loans are short-term loans used to finance the construction of a building. The money is given out in draws as the project progresses. The first draw can be used to purchase the land, if not already owned. Subsequent draws will typically require an inspection to make sure the money has been spent properly to keep the project on schedule. When the project is complete, the construction loan is paid out with a term loan as described above.

Interest Rates / Downpayments / Fees

Interest rates, downpayments, and fees will vary from lender to lender. Interest rates are usually based on the level of risk the bank perceives the borrower represents. Depending on the type of credit facility granted, you may be offered a fixed rate or a variable rate. On some term loans, the rate may be fixed for a length of time, say 5 years on a 15-year loan, then renegotiated for another period. Some lenders may offer a fixed rate for the entire term. Downpayments will also vary from lender to lender, as will potential loan fees. Remember, all interest rates, down payments, and fees can be negotiated. Offering to place your deposit accounts, merchant services, credit cards, other loans, etc. can be used as negotiating points.