The Truth about Getting a Business Loan
Due to the high unemployment rate worldwide, many who are out of the workforce now seek methods of starting their own business and securing financing. While the entrepreneurial spirit prevails, many such individuals are simply not qualified nor familiar with the steps required to start a new business. It is a fact that eighty percent of all new businesses fail within the first two years. Knowledge is power and without correct guidance, such individuals usually fail in their new business endeavor.
A corporation or limited liability company (LLC) is a separate business entity which affords the new business owner with the opportunity to build a separate business credit file separate from the principal of the business. This has numerous advantages to the business owner, especially if their personal credit is poor. As a corporation is a legal entity, the principal may obtain a loan guarantor to guarantee the financing to the corporation thereby avoiding the use of personal credit. In addition, in the majority of such instances, his/her personal credit will not be checked by the lender.
The automated business loan application process at your local bank
It’s said that collectively, the banks have over a trillion dollars in their possession. Much of this money is earmarked for business loans. With such a war chest at their disposal, it would be logical to assume that business loans are easy to get these days. Nothing could be further from the truth.
Are you seriously interested in a business loan for your company? Many business owners resort to the quick fix of going down to their local bank to fill out a loan application thinking that they have a relationship with the bank. Nothing could be further from the truth.
The fact of the matter is that you will be dealing with a loan representative who has no power to make a decision on the loan and who often has minimal training on financing. Once they take your automated application and submits it to the underwriter (who doesn’t know you from a hole in the wall) it is out of his/her hands!
Furthermore, what you tell the loan representative at your bank goes on that application. If you do not have the proper consulting from an expert source before completing that application the information provided may, and often does, sink you or impair your ability to get financing. So do not place your financial future in the hands of a loan representative at your local bank. Your business needs expert “one-on-one” consultations before you apply for financing with our qualified experts in the financing process.
The Catch–22 of business financing
Many small business owners think that their old school ways of no debt and no credit will help them in the financing process. In the real world, lenders base their decisions on the willingness to pay the loan and the ability of the borrower to pay. Willingness is demonstrated by the borrower’s credit history and then the corporate credit is checked. A steady payment pattern of debt and paid down balances is what the lender looks for as favorable. Those borrowers who have no credit or little credit are looked down upon as ghosts and are not viable in their determination. Ability to pay the loan is determined by the principal’s income and the corporation’s revenues.
So how do lenders grant loans?
Lenders base their loan decisions on the “willingness to pay and ability to pay” for the business and/or principals applying for the loan. Willingness is defined at the prior credit history of the corporation, LLC, or sole proprietor. If your business has a shaky credit history or none at all this will go against you in the loan process and we highly recommend that we prepare a comprehensive and complete business credit profile with Dun and Bradstreet on your business before we apply for financing.
Due to the US Patriot Act and post–9/11, legislation lenders are now required to verify the source of financing on the business entity and principal to avoid money laundering, terrorism and illegal business activities. The primary source that they use to verify information is Dun and Bradstreet. Lenders also check the personal history of the principal of the corporation or sole proprietor owner as the guarantor for payment. Do not be mislead by outrageous claims by online promises of funding up to $500,000 without a personal guarantee by the principal. In today’s tough economy it simply does not happen.
If your personal credit report is not up to the mark, we highly recommend that you arrange a qualified loan guarantor on your business with strong credit. Often the lenders will require two years business and personal tax returns on the principal before granting an approval, especially if you are a new business with less than two years in operation.
Do not be misled by “cut-rate” firms and even some attorneys that will set up your corporation for a few hundred dollars. In the majority of such cases, these parties are not familiar with the business loan process and more often than not, the corporation or LLC is setup incorrectly and/or does not conform to lender requirements. Even worse this negative “paper trail” can be difficult to correct and may make your new corporation or LLC severely handicapped in the financing process.
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