Advice on Financing Your Business Idea - The Money Chase

Bank Loans: Tried and True, but Not Always Approved

Banks and credit unions are common sources of business funding, yet only 20 percent of NAWBO members report using a commercial bank loan to finance their business. That's because these traditional lenders typically have a rigorous application and approval process, and many new businesses simply don't have the collateral or financial statements to meet their standards.

The Women's Business Development Center (WBDC) in Chicago is one of the oldest and largest women's business assistance centers in the United States. The WBDC (www.wbdc.org) promotes economic development through entrepreneurship and offers women business owners counseling, training, and financial advice. In fact, the has helped women-owned businesses secure more than $35,000,000 in loans since its founding in 1986. To help you determine if you are likely to qualify for a business loan, the WBDC put together this eleven-point checklist:

1. Do you have a good personal credit history?
2. Have you filed your personal and business income taxes?
3. Are your income taxes paid?
4. Have you demonstrated that your business has the ability to repay a loan?
5. Does your business have a positive net worth?
6. Is your business not carrying too much debt?
7. Do you have enough money of your own put into the business?
8. Do you have any collateral to secure a business loan?
9. Are you willing to personally guarantee a loan?
10. Does your business have managers and advisors capable of leading your business to the next level of growth?
11. Do you have experience in running your business?

If you can't answer "yes" to each one of these questions, you will probably have difficulty securing a bank loan. If, however, you've answered 'yes' to the above questions, and have confidence in your business plan and financial projections, it's time to prepare your loan proposal.

Remember that first and foremost, the bank wants to know if you will be able to repay the loan, and in your proposal they are looking for proof that you are a sound investment. At a minimum, the WBDC recommends your proposal include:

• Your business plan
• A current income statement and balance sheet
• Cash flow projections for one year, by month (with income and expenses detailed)
• Projected profit and loss for two years
• Articles of Incorporation
• Your resume
• Personal financial statements
• A credit report
• Personal income tax returns for the past three years
• Business income tax returns (if your business has existed long enough to file taxes)
• Information on existing business debts

If after all of this your loan application is denied, don't take it personally--and definitely don't give up on your dream. Instead, ask the loan officer for details about why you were rejected. Maybe you need to tweak your projections or provide more documentation and some simple changes will make your application more likely to be accepted the second-time around.

If at First You Don't Succeed, Let the SBA Help

"If you walk into a bank looking for a $30,000 loan, and you get that loan, then you don't need the SBA," Melanie Sabelhaus, deputy administrator of the SBA, likes to say.

But if you are turned down, an SBA loan-guaranty program could help you get the financing you need. The SBA offers a variety of loan programs to help small businesses, but doesn't do the actual lending. Mostly, the SBA acts as a guarantor of loans, pledging to share the risk with the bank if you default on your loan. There are different loan programs, with different terms, guaranty levels and requirements for use, but the most popular is the 7a Loan Guaranty program. This program guaranties term loans of up to ten years, with average loans of about $35,000.   In fiscal year 2003, the SBA guarantied more than 67,000 general business loans totaling more than $11.3 billion. Many of those were to startups that did not qualify for conventional loans.

"That's the beauty of the SBA," Sabelhaus says. "We're there when the bank says no."

One reason Ice Tubes' Moore says she didn't seek an SBA-backed loan immediately is that she had heard the application process was cumbersome and difficult. In reality, she says, it was no more complicated than a conventional application and she had a response much sooner than expected. Sabelhaus hopes to spread Moore's story and let people know the SBA is not the bureaucratic behemoth they fear. In fact, the SBA offers a new program with an online application and a 36-hour response time. The loan is still applied for and processed through a traditional lender, but with a much faster turnaround time. Through SBAExpress, the SBA will guaranty 50 percent of a general-use loan up to $250,000.

To learn more about all the SBA programs and local lenders participating in the guaranty program, visit www.sba.gov.

Rejected and Dejected? Microloans and Other Alternative Financing Sources

"Which came first? The chicken or the egg?" is a conundrum many entrepreneurs can relate to. In order to qualify for a loan, you need to have a proven track record; but in order to establish a track record, you need the help of a loan.

For many first-time entrepreneurs, microloans are the solution. Microloans are very small (usually $100 to $35,000) loans from community organizations to small-business owners who don't qualify for more traditional loans because of poor credit or little collateral. The SBA makes funds available to nonprofit, intermediary lenders through its Micro-Loan Program. The lender--not the SBA--then establishes its own loan terms and uses its own credit rating system, usually one more favorable to startups. Most microloans are term loans with higher interest rates than standard business loans and require some type of collateral or personal guaranty from the business owner. A complete list of SBA-affiliated microlenders is available at www.sba.gov /financing/microparticipants.html.

There are also independent, nonprofit microlenders, such as Merlino's Count Me In. This national organization, on the Web at www.count-me-in.org, offers business counseling and loans of $500 to $10,000 to women-owned enterprises. The first loan must be $5,000 or less, but each time a loan is repaid, the borrower is eligible to apply again. Count Me In relies entirely on donations for its funding and uses a woman friendly credit scoring system. For example, the online loan application doesn't ask how long the company has been in business, but rather how long the owner has worked in the industry.

"We recognize that there are some women out there who don't have good personal credit, don't have friends or family they can go to for money, and don't qualify for a traditional loan," says co-founder and CEO Merlino. "These might be women with 20 years of business experience, but they don't qualify for a bank loan because they've never owned a business before. We exist to fill that gap."

The Association for Enterprise Opportunity at www.microenterprise.org is a good source for information on microlenders. The association represents microenterprise development programs (private, nonprofit organizations that support startups with counseling and microloans) and can help you locate a microenterprise organization near you.

Is your business in a low-income area or will it create jobs for low-income individuals? If so, a Community Development Financial Institution (CDFI) could help you. CDFIs are private, financial intermediaries that give credit and loans to new businesses that encourage community and economic development, but are considered high risk by traditional lenders.

Finally, your local SBDC is a good clearinghouse for alternative financing options. For example, there are a number of local, regional, state and federal loan programs your business might qualify for if it is an underserved, rural or low-income area. You can find the nearest SBDC by visiting www.sba.gov/sbdc.

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