When a newspaper reporter asked bank robber Willie Sutton why he robbed banks he answered, “Because that’s where the money is.” And Willie was right if you're trying to grow a business too--banks do supply the bulk of the money for small businesses.
If you've read other articles we've written you know that most successful businesses are started with the founder's own money, and maybe with help from friends or family--perhaps even angel investors. But if you have some success behind you, a bank loan may be a possibility.
Why and How Banks Lend Money In effect, bankers are a little like Robin Hood except that banks take from the cash rich and give, er . . . make that lend, to the cash poor. In other words, banks rent money to you at a price (interest) rate that’s high enough to cover what they pay to borrow it from depositors, plus they're fixed expenses and some profit.
What a bank can offer you is regulated to protect their depositor's money (maybe your money) that they're lending. The bank’s size, its own asset/liability mix, and their management preferences all influence what the bank will do. As a result, banks vary widely in their product offerings and risk appetite. So, to cut to the chase, it’s not at all unusual for one bank to approve a loan that others have declined.
Commercial Loans Business loans from banks range can be from a few thousand dollars up to a maximum based on the size of the bank and their risk appetite. Smaller banks are more limited than big ones, but they can often make a larger loans by sharing it with other banks.
Most small-business loans are secured with liens on you company and personal assets. You may not have to pledge your first born, but lenders will require personal guarantees (you spouse will sign too) especially if your business doesn’t have a strong credit history, reliable cash flow, or offer enough collateral. Your home is often taken as additional collateral on such loans, so don’t feel like you’re being singled out if they want you to to literally pledge everything you own. Think of it from the bank's perspective: if you're not willing to risk everything, why should they risk anything?
How long will it take to get the money you need? Expect the process to take at least several weeks . For loans over $100,000 four to eight weeks isn't unusual. And do spend it before you get it; once the loan is approved it may take several days or even weeks to actually receive your money.
Personal Loans You might be able to find money for your home based business with a home equity loan, second mortgage, first mortgage refinancing, and personal loan. These are different than commercial or business loans because they're handled by the consumer lending side of the bank rather than the commercial lenders. If your credit and income history is good consumer loans are easier to obtain than commercial loans, they’re governed by consumer protection regulations, and they have fewer strings attached.
Keep in mind that many lenders won't let you use a personal loan for a business, but others don't mind. So shop around before you try the old "I just want the money for a vacation and to fix up some stuff around the house" trick—it's fraud, and although a lot of people use that scheme, you may loose more than your loan if they find out.
Consumer loans don’t require a business plan, company financial information, or most of the other documentation that business loans require; and they're usually less than four pages including a personal financial statement. Approval can occur in days and even hours if you credit score is good. In addition, consumer lenders may or may not require collateral depending on your credit and income history.
Thanks to consumer protection laws, as long as you make your payments--even if your business is hurting--you probably won’t run the risk of having the bank pull the loan. That can and does happen with business loans, and they'll want the rest of their money pronto.
So banks can help if you can show that you and your business are a good risk, especially if you have a a long history with the bank and money on deposit.
Why not use the money you have in savings? Use your credit when you can, your cash is always good.
Home Based Business--Bank Loans To Grow - To learn more about this author, visit Kate Lister's Website.
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