Many Texas companies need loans to get started or to make progress but many first-time entrepreneurs forget to research the qualifications needed to for a business loan. I recently sat down with Lindsey Leaverton, a Vice President of BB&T Wealth and former Business Relationship Manger,. We covered some of the topics that all small businesses need to realize to be bankable. First, it is important to realize that bankability is a holistic concept and there is no magic formula to follow. With that in mind, here are some other general concepts that anyone contemplating a business loan in their future should consider:
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Need for a Loan. Obviously, the first consideration should revolve around the need for a loan. If this hasn’t been well considered, documented, and planned, a small business is not yet in the position to ask for money. Some organizations determine that the Dave Ramsey finance-free method is most appropriate for them while others know they their rate of return will easily cover the expense of a loan. The determination is highly personal and should be based on the discipline, revenue flow, culture, and growth patterns of the business.
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Types of Loans. The optimal position for any small or medium sized company to be in is to have their choice of investment vehicles. Traditional loans, venture capital investments, small business loans, and angel investors should all be considered. Ultimately, your entity will determine that you are not eligible for some infusions or are disinterested in others. The availability of options is, however, of paramount importance.
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City and SBA Loans. These types of loans typically require 2 years of profitability. Further, if you are bankable, the rates and terms of traditional banking are generally far better. It is important to be aware of these loans, though, to include in the mix of options and combinations that should be considered. It is also important to do research into these government-backed loans to determine if your industry is currently eligible for any particular incentives.
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Loan qualification. The concept of bankability is holistic. Banks consider the company’s cash flow, the ability to repay the loan, tax returns for the business, credit –worthiness of the business owners, liquidity of capital, and the overall character of the applicant.
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Lending to a “company.” Ms. Leaverton reported that many companies who apply for loans do not actually exist. Even some very successful companies do not technically exist. It is important that a company seeking lending seek legal advice regarding forming a proper entity, with the proper formalities, and registered with the proper state and federal agencies. There is some additional information about entity creation here.
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Tricks of the Trade. Ms. Leaverton relayed a few tips for new and smaller companies.
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The first is that a company who foresees a need for financing should apply for a line of credit well before they need any money. Entities are much more bankable when they are not in a position of neediness and the process of acquiring that line of credit will educate the owner well regarding the particular considerations a bank will consider when looking at their company.
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Also, Ms. Leaverton, who is a representative of BB&T, reported that BB&T is one of the only lenders in town who will consider loaning to companies younger than two years old.
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The SCORE program will prepare future lenders to have the types of documents and practices in place so that their company is more bankable. Ms. Leaverton believes the SCORE program is superior to other free programs available and sends many of her clients there.
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Following the tips above will get you well on your way to finding lending resources but is also important to understand what NOT to do when you anticipate your company will need a loan.
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Don’t quit your day job. Since 2008 banks almost never lend without a personal guarantee. If the personal guarantee is yours, how will you repay them if the indebted company fails and you have no other source of employment?
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Do not operate as a sole proprietor. If you are a sole proprietor, you are not a company. Find an attorney who can walk you through the steps of entity formation.
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Do not spend time finding space or collecting bids. Folks do this all the time. It is good to have a general idea what rent and build out will cost, but committing that yourself without financial backing does not show that you have the business-savvy to be awarded a loan.
