Commercial Loan Financing
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Securing commercial loan financing is quite different in many ways than securing a mortgage for a home. Knowing the landscape upon which a business lending agreement rests is crucial in being successful in raising the money for that self owned business dream that so many entrepreneurs have. Making sure there are a number of things in place before seeking commercial loan financing is paramount. In fact, unlike buying a house where there are only a few issues like credit score and debt to income ratio, many business loan experts suggest that there may be as many as three dozen factors going into such a lending arrangement. The following is not an exhaustive list and neither are the items listed in order of importance.
One of the things a financing officer will look for is whether or not the prospective owner has experience in the business being purchased or started. A bank would not be real comfortable with an auto mechanic opening a four star restaurant or a career teacher opening an auto parts store. A person must show that life experience has led to proficiency in the specific area of business. A commercial loan financing officer will also want to know if the small business owner is willing to put up personal capital, especially if the business property being bought is overpriced, and there will be a look into whether that factor exists. Another factor going into getting such a lending agreement is that the buyer of the business shows flexibility in structuring the lending agreement in such a manner that it is approved.
If a borrowing agreement requires that a potential owner have a down payment on the property in order to secure the commercial loan financing, there may be a number of resources to explore. First of course would be one's own residence, but only if there is enough equity in the house to cover the down payment. This could easily come in the form of a home equity loan or a home equity line of credit. Another source could be personal loans from friends or family. Retirement savings or plans could be another source of securing this business lending agreement. The personal collateral options are, of course, the most fearsome to consider because they represent not only one's own security but also to many degrees one's family security also. They also are a sign of whether a person is truly committed to starting or buying a business or not.
Before ever seeking a business lending agreement, a borrower needs to have a solid business plan in place. A business plan has several components and a set of goals which are measurable and definable regarding the business one wants to purchase or begin. The commercial loan financing officer will want to know the reasons the buyer is optimistic about making those goals. The business plan will also include backgrounds of the owner and any other staff persons that will be employed at the beginning of the process. The commercial loan financing officer will also want to know how the product or service is to be marketed and will explore with the owner how those strategies were formulated. Getting a loan to buy a business that repairs home air conditioners in Maine may prove difficult because the houses that have air conditioning are few and far between! Likewise, opening a clam shack advertising same day clams might be a tough sell in Indiana.
Of course, one of the biggest concerns to a commercial loan financing officer is the solvency of the prospective borrower. Long before seeking a business lending agreement, a borrower should not only know what his credit score and history is, but should go about cleaning up as much of it as possible. Also the borrowers personal debt to income ratio will be explored which may reveal signs that perhaps the borrower is not the most prudent user of credit. In some cases, a borrower may have all of the paperwork in order and all of the needed down payment funds, but his personal borrowing history will cause the lending agreement to tank. "Also I say unto you, Whosoever shall confess me before men, him shall the Son of man also confess before the angels of God." (Luke 12:8)
The Small Business Administration should be the beginning point in exploring the possibility of securing commercial loan financing. The SBA can offer a number of very helpful tools for the entrepreneur, including learning the habits of successful business owners. The SBA says that entrepreneurs learn how to be successful and that almost any person can own a business, provided the right training is in place. This agency is primed and ready to help an owner secure financial assistance by guiding them to the lenders for their type of business as well as provide online training in a number of areas specifically for the small business owner. In addition to these services, there are a limited number of SBA backed loans for entrepreneurs.
Getting a business lending agreement means getting everything in order, including personal finances. Of course, if the prospective borrower is married, the spouse should be totally behind the concept as well as the children if they are old enough to understand. After all, running one's own business affects all of them in so many ways. Do an honest self examination of strengths and weaknesses and have your spouse and a few other close trusted advisors also participate. Business seashores are littered with the bones of many who never were honest with themselves.
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