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Borrowing Money

By Chris Margetis
Jul 6, 2005

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Borrowing money is one of the most common sources of funding
for a small business, but obtaining a loan isn't always
easy. Before you approach your banker for a loan, it is a
good idea to understand as much as you can about the factors
the bank will evaluate when they consider making you a loan.
This discussion outlines some of the key factors a bank uses
to analyze a potential borrower. Also included is a self-
assessment checklist at the end of this section for you to


Let's begin by exploring some of the key points your banker
will review:

1. Ability to Repay/Capacity

The ability to repay must be justified in your loan package.
Banks want to see two sources of repayment -- cashflow from
the business, plus a secondary source such as collateral. In
order to analyze the cash flow of the business, the lender
will review the business's past financial statements.
Generally, banks feel most comfortable dealing with a
business that has been in existence for a number of years
because they have a financial track record. If the business
has consistently made a profit and that profit can cover the
payment of additional debt, then it is likely that the loan
will be approved.

2. Credit History

One of the first things a bank will determine when a
person/business requests a loan is whether their personal
and business credit is good. Therefore before you go to the
bank, or even start the process of preparing a loan request,
you want to make sure your credit is good.

First get your personal credit report. You can obtain a
report by calling TransUnion, Equifax, TRW or another credit
bureau. It is important that you initiate this step well in
advance of seeking a loan. Personal credit reports may
contain errors or be out of date. In many cases, people find
that they paid off a bill but that it has not been recorded
on their credit report. It can take 3 to 4 weeks for this
error to be corrected -- and it is up to you to see that
this happens. You want to make sure that when the bank pulls
your credit report that all the errors have been corrected
and your history is up to date.

Once you obtain your credit report, how do you know what it
says? Many people receive their credit reports yet have no
idea what the strange numbers signify. The following should
help in interpreting and checking your personal credit

3. Equity

Example: A new business needs a $100,000 to start. The
business owner must put $20,000 of her own money into the
new business as equity. Her loan will be $80,000. The debt
to equity ratio is 4:1. Note also that this is only one of
many factors used to evaluate the business -- just having
the right debt/equity ratio does not guarantee you'll get
the loan.

The balance sheet indicates the amount of equity or net
worth of a business. The net worth of the business is often
a combination of retained earnings and owner's equity. In
many cases, owner's equity will be shown as a loan from
shareholders and therefore a liability. If a business owner
wishes to obtain a loan, she will be obligated to pay the
bank back first and not herself. Consequently, it may be
necessary to restructure the liability so that it becomes
owner's equity or subordinate the loan. If the current debt
to net worth is 4 or over it is unlikely that the business
will be able to obtain additional debt/loan.


The key questions the banker will be seeking to answer are
as follows:

1. Can the business repay the loan? (is cash flow greater
than debt service?)
2. Can you repay the loan if the business fails?
(is collateral sufficient to repay the loan?)
3. Does the business collect its bills?
4. Does the business control its inventory?
5. Does the business pay its bills?
6. Are the officers committed to the
7. Does the business have a profitable
operating history?
8. Does the business match its sources
and uses of funds?
9. Are sales growing?
10. Does the business control expenses?
11. Are profits increasing as a percentage of sales?
12. Is there any discretionary cash flow?
13. What is the future of the industry?
14. Who is your competition and what are their strengths

4. Collateral

Financial institutions are looking for a second source of
repayment, which often is collateral. Collateral are those
personal and business assets that can be sold to pay back
the loan. Every loan program, even many microloan programs,
requires at least some collateral to secure a loan. If a
potential borrower has no collateral to secure a loan,
she/he will need a co-signer that has collateral to pledge.
Otherwise it may be difficult to obtain a loan.

The value of collateral is not based on the market value. It
is discounted to take into account the value that would be
lost if the assets had to be liquidated.

5. Experience

A client that wants to open a business and has no experience
in that business should not seek financing let alone start
the business unless they intend to hire people who know the
business or take on a partner that has the appropriate
experience. Regardless, the client should be advised to take
some time to work in the business first and take some
entrepreneurial training classes.


Whether you are applying for a microloan, SBA loan or a
traditional bank loan, there are certain factors that
improve your ability to obtain financing.

To receive a simple checklist to do before you begin to seek
capital, and a F*ree 5 Day course in Small Business
Administration via email, send me an email at

Christos Margetis is a Business Analyst & the president of
ClickGoFind.com & owner of various other Financial sites.
The tips in this article were extracted from Chris's
Blog at http://www.clickgofind.com:8080/blogs More
on Business Loan Resources you can always find on his site

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