perlo
01-19-2008, 09:14 AM
From Darrell Zahorsky,
Part 1: Traditional Rules for Small Business Financing
An important source of funding for your business in the future can be the bank. For decades, banks have supplied the business community with small business financing. As most business owners will come to know, obtaining a loan can be a trying ordeal.Learn what you need to know about getting credit or loans for your small business.
The "traditional" rules of banking relationships and the 5 C's of credit will be explored. Be aware of changes sweeping through the small business lending community in North America. New rules apply to small business financing game. If your business doesn't understand the new game, you could be left out in the cold.
Relationship banking has been the cornerstone of small business financing. A good relationship between the business owners and bankers allows for the free exchange of knowledge and the ability to meet the needs of business.
A banker informed of your business can offer practical advice on financial matters.
Setting up a relationship with your banker begins with following a few tips:
# Set up a bank account at a bank that deals with your size and type of small business.
# Manage the account effectively and avoid overdraws, bounced checks, and low balances.
# Borrow a short-term loan and pay quickly to establish your business credit.
# Keep your bank informed of upcoming issues, missed projections, and missed payments.
# Get to know your banker and help them to understand your business.
Relationships can be beneficial when it comes time to apply for a loan or large credit line. Remember, banks are in business and all companies need to assess risk and make profits. In the process of loan approval, banks consider the 5 C's of credit.
Part 2: The 5 C's of Small Business Credit
Bankers making a loan approval will review a small business in the context of the 5 C's for small business credit as follows:
Character: The bank assesses the trustworthiness of candidates for character. Factors for character criteria are: business experience and knowledge, personal and/or small business credit history, references, and education.
Capacity: The business and individual's ability to pay back the small business credit determines capacity. Bankers will review the cash flow of the business and determine alternative courses of repayment available.
Collateral:To reduce the risk of lending, collateral in various forms of assets can act as another method of repayment. Collateral would include: equipment, real estate, inventory, account receivables, and securities.
A personal guarantee (signed document) can be required as an additional reassurance of repayment. Obtaining small business credit and providing guarantees may seem troubling, but the bank really does not want to exercise its position on seizing and liquidating assets. In most cases, the banker will work diligently to find payment solutions.
Conditions: This is a review of the small business credit or loan conditions in terms of use for expansion or buying equipment. This also applies to the external environment that impact a company's ability for repayment such as: customer base, competitors, liabilities, and economics.
Capital: A business owner's investment into their own company sends a message of confidence in the business and the ability to repay the small business credit or loan. Net-worth and equity are the two key financials used. Ultimately, a business owner unwilling to invest their own funds in the company will often find banks are unwilling to take the first risk.
Each of the five C's are reviewed by the banker for small business credit financing determination. Data for the assessment is obtained from credit histories, business plans, appraisals, business owner interviews, and outside experts. Any loan refusal warrants asking the bank for an explanation. Ask if any other information can shed a different light on the application. Escalate the small business credit or loan request to a department head if possible.
Often another bank better suited to your business needs or alternative funding (SBA loan) will be the solution. At times, rejection can be based on outside factors such as risk factors in a particular industry or the overall economic conditions. Understanding the 5 C's and banking relationships can definitely help in the approval process... or can they?
Part 3: The New Rules of Small Business Financing
Change has swept through industries, society, and careers. Over the last few years, change and its companion (information technology), is altering the face of small business financing. What your banker doesn't want you to know is that the relationship-based banking in the small business financing market is now often irrelevant. The decision of loan approval is determined by a computerized credit scoring program, unless a business requires a loan or credit product over $100,000.
Automated credit scoring reduces the subjectivity of the loan process and improves the bank's profitability. Having a relationship with your banker does help in some areas, but not with automated credit scoring.
It may benefit some companies when the subjectivity is removed. For instance, a commercial banker with many failed restaurants in his credit portfolio may be more inclined to decline your loan.
The credit scoring system would remove any bias present in the decision-making process. The other possible benefit is credit scoring removes the need for a business plan and only financials are required.
In light of the "new rules" governing the small business financing process for small businesses, the business owner can adopt these strategies:
Small Business Financing Strategies for the New Lending Environment
# Assess Credit Needs: If the amount needed is closer to $100,000, apply for $110,000 or more. Usually if the bank wants a business plan, it might not be using a credit model.
# Get Your Credit Report: Before making a loan or credit application, obtain your credit report and check for errors and omissions.
# Be Accurate: If you are applying for less than $100,000 and the bank is using credit scoring automation, go over all questions for the loan or credit application. Make certain the data you provide is accurate and ask questions to understand the information in the application.
# Watch Your Code: Make sure you provide an accurate description of your business. The bank can code your company by NAICS (North American Industry Classification System) or the dated SIC codes. Inaccurate coding can alter the outcome of the approval.
# Know Why: If your application is declined ask for an explanation or a "human" review.
# Find a Bank: Consider the type of bank you select for applying for small business financing. A larger bank or institution will use the automated credit scoring system more. Seek out local community banks or specialty banks for a particular industry.
The new changes to the small business financing market represent an intensifying competitive industry. Many non-bank players (eg.Intuit, State Farm, GE Capital Corp.) are forcing banks to adapt to the market or lose market share. For the small business owner, this means a greater choice and service as all companies wake-up to the size and power of small business.
http://sbinformation.about.com/cs/bestpractices/a/aa090102a.htm
Part 1: Traditional Rules for Small Business Financing
An important source of funding for your business in the future can be the bank. For decades, banks have supplied the business community with small business financing. As most business owners will come to know, obtaining a loan can be a trying ordeal.Learn what you need to know about getting credit or loans for your small business.
The "traditional" rules of banking relationships and the 5 C's of credit will be explored. Be aware of changes sweeping through the small business lending community in North America. New rules apply to small business financing game. If your business doesn't understand the new game, you could be left out in the cold.
Relationship banking has been the cornerstone of small business financing. A good relationship between the business owners and bankers allows for the free exchange of knowledge and the ability to meet the needs of business.
A banker informed of your business can offer practical advice on financial matters.
Setting up a relationship with your banker begins with following a few tips:
# Set up a bank account at a bank that deals with your size and type of small business.
# Manage the account effectively and avoid overdraws, bounced checks, and low balances.
# Borrow a short-term loan and pay quickly to establish your business credit.
# Keep your bank informed of upcoming issues, missed projections, and missed payments.
# Get to know your banker and help them to understand your business.
Relationships can be beneficial when it comes time to apply for a loan or large credit line. Remember, banks are in business and all companies need to assess risk and make profits. In the process of loan approval, banks consider the 5 C's of credit.
Part 2: The 5 C's of Small Business Credit
Bankers making a loan approval will review a small business in the context of the 5 C's for small business credit as follows:
Character: The bank assesses the trustworthiness of candidates for character. Factors for character criteria are: business experience and knowledge, personal and/or small business credit history, references, and education.
Capacity: The business and individual's ability to pay back the small business credit determines capacity. Bankers will review the cash flow of the business and determine alternative courses of repayment available.
Collateral:To reduce the risk of lending, collateral in various forms of assets can act as another method of repayment. Collateral would include: equipment, real estate, inventory, account receivables, and securities.
A personal guarantee (signed document) can be required as an additional reassurance of repayment. Obtaining small business credit and providing guarantees may seem troubling, but the bank really does not want to exercise its position on seizing and liquidating assets. In most cases, the banker will work diligently to find payment solutions.
Conditions: This is a review of the small business credit or loan conditions in terms of use for expansion or buying equipment. This also applies to the external environment that impact a company's ability for repayment such as: customer base, competitors, liabilities, and economics.
Capital: A business owner's investment into their own company sends a message of confidence in the business and the ability to repay the small business credit or loan. Net-worth and equity are the two key financials used. Ultimately, a business owner unwilling to invest their own funds in the company will often find banks are unwilling to take the first risk.
Each of the five C's are reviewed by the banker for small business credit financing determination. Data for the assessment is obtained from credit histories, business plans, appraisals, business owner interviews, and outside experts. Any loan refusal warrants asking the bank for an explanation. Ask if any other information can shed a different light on the application. Escalate the small business credit or loan request to a department head if possible.
Often another bank better suited to your business needs or alternative funding (SBA loan) will be the solution. At times, rejection can be based on outside factors such as risk factors in a particular industry or the overall economic conditions. Understanding the 5 C's and banking relationships can definitely help in the approval process... or can they?
Part 3: The New Rules of Small Business Financing
Change has swept through industries, society, and careers. Over the last few years, change and its companion (information technology), is altering the face of small business financing. What your banker doesn't want you to know is that the relationship-based banking in the small business financing market is now often irrelevant. The decision of loan approval is determined by a computerized credit scoring program, unless a business requires a loan or credit product over $100,000.
Automated credit scoring reduces the subjectivity of the loan process and improves the bank's profitability. Having a relationship with your banker does help in some areas, but not with automated credit scoring.
It may benefit some companies when the subjectivity is removed. For instance, a commercial banker with many failed restaurants in his credit portfolio may be more inclined to decline your loan.
The credit scoring system would remove any bias present in the decision-making process. The other possible benefit is credit scoring removes the need for a business plan and only financials are required.
In light of the "new rules" governing the small business financing process for small businesses, the business owner can adopt these strategies:
Small Business Financing Strategies for the New Lending Environment
# Assess Credit Needs: If the amount needed is closer to $100,000, apply for $110,000 or more. Usually if the bank wants a business plan, it might not be using a credit model.
# Get Your Credit Report: Before making a loan or credit application, obtain your credit report and check for errors and omissions.
# Be Accurate: If you are applying for less than $100,000 and the bank is using credit scoring automation, go over all questions for the loan or credit application. Make certain the data you provide is accurate and ask questions to understand the information in the application.
# Watch Your Code: Make sure you provide an accurate description of your business. The bank can code your company by NAICS (North American Industry Classification System) or the dated SIC codes. Inaccurate coding can alter the outcome of the approval.
# Know Why: If your application is declined ask for an explanation or a "human" review.
# Find a Bank: Consider the type of bank you select for applying for small business financing. A larger bank or institution will use the automated credit scoring system more. Seek out local community banks or specialty banks for a particular industry.
The new changes to the small business financing market represent an intensifying competitive industry. Many non-bank players (eg.Intuit, State Farm, GE Capital Corp.) are forcing banks to adapt to the market or lose market share. For the small business owner, this means a greater choice and service as all companies wake-up to the size and power of small business.
http://sbinformation.about.com/cs/bestpractices/a/aa090102a.htm