The purpose of this piece is to provide a basic road map for obtaining small business startup financing particularly from a bank. However, some points might prove useful to an existing business.
There are three basic business organizations: sole proprietorship, partnerships, and corporations. The simplest being the sole proprietorship. The type of organization chosen depends on the circumstances and makes for the easiest loan application.
What is needed:
• Personal and business (if not a startup) credit histories,
• One year cash flow projections showing how the loan payments are to be made,
• A financial statement as to the loan amount and how it is to be used,
• A simplified business plan,
• A proforma balance sheet and a proforma income statement, and
• Organizational documentation.
As a rule of thumb, after the loan is made, the owner(s) should have at least a one-third interest in the business. In cases where ownership financing is involved, the “old” owner’s retained interests can be counted depending on the lender’s policies. If needed, most banks have a “partnership” relationship with the Small Business Administration. Under the SBA’s 7A Loan Guarantee Program, qualifying loans are guaranteed to the bank up to 80% of the outstanding principal and interest. For more details, visit www.sba.gov.
There are many types of worthy banks. Unless there is a compelling reason otherwise, the best bank to approach is a Community Bank. These banks are locally owned, and loan decisions are made locally.
• Never approach the banker “cold turkey.” Be prepared to respond to his questions even during the first meeting.
• Be prepared to respond to any potential problems.
• Once he says yes, close the subject. Just accept the yes.
Robert C. Ramos is a graduate of Del Mar College and Texas A&M Kingsville. He retired from the Small Business Administration in 1994 and owned and operated The Gabriel Group, Inc., a DOD contracting company, until October 2014.
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