The creditor does not acquire
any ownership claim in the debtor's business
the current economical structure avenues for small and local business
are rapidly increasing. This is resulting into different types of
financial supports from different institutions to patronize the
fresh attempts to start new business.
in the form of a loan, is a prime and most widespread way of finance
for a new business. As a creditor agrees to lend money to a debtor
in exchange for reimbursement in future, with accumulated interest,
it becomes a loan. The creditor does not gain any ownership claim
in the debtor's business.
are many types of institutions that offer start-up business loans
Banks: These include traditional savings banks, savings
and loans, and commercial banks, and highly approachable for start
up business. Banks, according to their loan offers, can be generally
divided into following categories -
Large commercial banks are potential sources of financing for the
best credit risks. For start-up businesses this conventionally is
not an apt resource for financing.
b) Small community banks
are still the best lenders for the standard new businesses. Start-up
businesses may establish an ongoing working relationship with such
Credit unions: Are financial institutions managed and under
the ownership of a group of workforce of a company or other organization.
This generally offers generous provisions to their members, but
also makes mostly consumer loans. Though the amount may not be large,
yet this may be helpful in initial business.
Consumer Finance Companies: This offers small, secured,
higher-interest personal loans to higher-risk borrowers. Because
of this cost, consumer finance companies are not the usual lender
of choice for start-up businesses.
Commercial Finance Companies: these companies typically
prefer to put forward loans which are secured by commercial possessions,
these types of loans are handy for conventional businesses, not
banks also offer some general types of loans like:
Working Capital Lines of Credit: Not suitable for start-up business.
A line of credit offers a maximum amount of money accessible, to
use whenever required, for different cash needs of a business.
Credit Cards: This is a higher-interest, unsecured revolving credit.
Short-term Commercial Loans: For almost all startup businesses this
will have to be secured by adequate collateral. For startups and
comparatively new small businesses, most bank loans are generally
Long-term Commercial Loans: Not suitable for start-up business.
This is usually available against real estate or other major assets
and the longer the term of the loan means a risk to the lender.
Equipment Leasing: Not suitable for start-up business. Most banks
require a solid operating history before engaging in leasing agreements
with small businesses.
Letters of Credit: A letter of credit is an agreement of payment
upon verification that contract terms between a buyer and seller
have been accomplished. This is most suitable for businesses engaged
in international trade.
There are also other
avenues for conceiving money to start a business –
Asset based Financing: To generate working capital or to
achieve definite short-term cash requirements, small businesses
may use certain short-term assets as collateral for commercial loans.
Trade Credit: The suppliers and the customers signify probable
sources of financing through a range of credit and pricing options.
Start-up businesses may benefit from shopping for potential suppliers
as a business location is picked out. Many new businesses rely a
lot upon a single dealer with whom they can achieve a long-term
relation of credit purchases. It is wise to present the proposal
to several possible suppliers, taking care to outline how much inventory
is required to get started and how much is to be bought from the
supplier in the future.
A substantial cash surrender value in a life insurance policy
provides the chance to borrow it and then re-lend the money to the
business at the same interest rate. At this condition the business
may take an interest deduction on the loan without earning any taxable
interest income on the contract. When the money is borrowed against
a policy, it is not obligatory to repay the loan principal, but
only to pay interest on the loan.
The process of approval
of a loan involves the collection and submission of a large amount
of documents. For start-up businesses a bank will usually request,
at a minimum, the following documents:
A personal financial report (usually lender's own form) and personal
federal income tax returns (one to three years)
Projected start-up cost estimations
projected balance sheets and income statements (minimum of two years’)
projected cash flow statement (minimum of the first 12 months)
Verification of ownership interests in assets and collateral
A business plan that includes a narrative explaining the specific
use for the requested funds, how the money will assist the business,
and how the borrowed funds will be repaid (repayment sources and
duration of repayment period). Any assumptions used in developing
projected financial statements should also be identified. A personal
resume or a written statement of pertinent past business experience
is also submitted. Letters of reference also increases the chance
of a loan approval. Sometimes with the documents, details of breakeven
and other financial projections in the form of a graph are requested.
elementary characteristics a potential lender examines are:
Credit and cash flow history of the borrower
Projections for the business
Available Collateral to protect the loan. Startup businesses generally
use the equity value in real estate as its source of collateral.
Character of the borrower. This has an important significance in
start-up business. It indicates successful prior business experience,
an existing or past relationship with the lender, referrals by the
respected society members, references by the professionals (e.g.
accountants, lawyers, business advisors) who have reviewed the primary
proposals, and community involvement.
Loan documentation including business and individual financial statements,
income tax returns, and often a business plan, supporting the first
four items listed.
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