When you are just starting your business, you may find it difficult
to obtain a bank loan. This is because many banks first want to see
that you already have a profitable business with positive cash flow.
Banks will also want to see that you are able to repay your loans over
time (e.g. you have a good credit history and/or sufficient personal
equity), and that your business has been operating successfully for
at least three years. Wells Fargo Bank, for example, prefers that your
business generate at least $1.50 in cash flow for every $1 you pay out
to cover expenses. They also want to see that you have not declared
bankrupty within the last ten years and that you have no liens, suits
or judgments against you or your business.
In some instances banks may look at business references or former employment
to determine your creditworthiness, but usually they will require a
As a result, many new businesses are funded by credit cards, loans
from friends or family, or personal savings. Some people will apply
for a home loan and use the equity on their house to fund their business
venture (called getting a "second mortgage").
Also be sure to look for local sources of funding from civic development
agencies. Miami-Dade County and the City of
Hialeah offer a number of funding programs for small to medium sized
businesses, even those that are not eligible for bank loans or other
credit. Click here to learn
more about these programs.
Whichever method of "seed capital" you choose for your business, it
is crucial to establish a good credit record. Obtain a credit card or
two, and establish a consistent record of making timely payments. Look
for a card with the lowest possible interest rate and no annual fee.
Major cards include Visa, Mastercard, American Express and Discover.
There are a multitude of banks that issue their own Visa and Mastercards
with varying interest and fees. Compare cards before you obtain one,
and be sure to read the fine print: make sure your card won't penalize
you with an exorbitant interest rate if you miss your payment by a few
If you have run your business profitably for a few years and are ready
to expand, the Small Business Administration may be a good source of
a loan guaranty. Ask your bank for a loan first; if they are unwilling
to give you a loan, they may be willing to review your application if
the SBA guarantees a portion of the loan through the SBA
Loan Guaranty Program. The terms of this loan are generally five
to ten years, or up to 25 years for assets like real estate or equipment.
SBA Interest Rates: Lenders may not charge over the maximum
rate of 2.25% over the lowest prime rate for a loan period under 7 years;
or 2.75% over the lowest prime rate for a loan period over 7 years.
What does the SBA look for in a prospective loan recipient?
- repayment ability from the cash flow of the business
- good character, usually indicated by consistent and timely payments
to one's creditors and suppliers
- management capability
- collateral for the loan in the form of business assets like equipment
- owner's equity (cash, IRA's, a house)
Contact Info: http://www.sba.gov/financing/sbaloan/7a.html