EasyK.com Free Reports

A Guide to Business Credit for Women, Minorities, and Small Businesses

The need for financing is a critical and perennial concern

for the owners of small businesses. Indeed, few things are as

crucial to the health of a small business operation. Many small

businesses are launched by the personal resources of their

owners. But they can quickly reach the stage where the owner

must look to the credit market for financial help in expanding

operations. The banking industry is an important source of

working capital. However, entrepreneurs may not realize that

applying for commercial credit is a more customized process

than obtaining consumer credit, and requires a great deal of

preparation by the business applicant. This brochure may help

to de-mystify the process and improve your chances of getting

the credit you need.

Types of Loans

Banks and other financial institutions can assist you by

providing funds through personal or commercial credit. Examples

of personal credit include automobile loans, credit cards, and

home mortgages. Commercial credit includes business loans; here

are some of the options:

Short-term loans are one of the most common types of

business loans and are usually for less than one year. They can

provide interim working capital for a business temporarily in

need of cash, and are typically repaid in a lump sum when

inventory or accounts receivable are converted into cash.

Intermediate-term loans are often used for a business

start-up, the purchase of new equipment, expansion, or an

increase in working capital. The maturity dates range from one

to three years.

Long-term loans generally are made for major capital

improvements, acquiring fixed assets, or business start-ups.

The term of the loan runs for periods of three to five years

and is usually based in pan on the life of the asset financed.

Repayment is usually made in monthly or quarterly installments.

A line of credit offers you the ability to borrow money

repeatedly, up to your credit limit, without having to reapply.

A line of credit is particularly important to businesses that

experience seasonal fluctuations. The lender generally will

perform a review once a year, at which time the borrower is

asked to provide updated financial statements.

The Credit Application Process

Applying for commercial credit can be tedious. It calls for

more documentation than you might initially have expected and

certainly a lot more than when you apply for consumer credit.

For lenders, extending credit to an entrepreneur usually means

customizing the loan to suit the credit needs of that business.

So don't be disheartened by the amount of paperwork needed to

accompany the application. Instead, be prepared!

Among the best assets you can bring to the lender is a

well thought-out and documented business proposal. You need to

clearly state the purpose of the loan (will the money be used

for temporary working capital, buying equipment, or expanding

facilities); the amount of funds needed and for how long; and a

repayment schedule. Your business proposal should include the

following information:

* business description that tells the nature of the

business, describes the product and its market, identifies

its customers and competition.

* personal profile that outlines the background and

experience of each of the principals in a resume.

* proposal that states the type of loan requested and its

purpose.

* business plan that outlines your corporate strategy. for

the next three to five years; it will aid you and the

lender in determining whether the business will generate

the cash flow needed to repay the loan.

* repayment plan that tells how you propose to repay the

loan or outlines a repayment schedule. The lender will be

expecting you to repay the borrowed funds from the profits

produced by the business. As a contingency, you might need

to develop a plan on how you would repay the loan if the

profits alone turned out to be inadequate.

* supporting documentation will include copies of pertinent

papers that support the information contained in your loan

proposal--for example, a lease, certificate of

incorporation, partnership agreement, letters of reference,

contracts, invoices or vendor quotes.

* collateral that you will use to secure the payment of the

loan. Collateral can include business and personal assets

such as inventory, equipment, and accounts receivable or

real estate, stocks, bonds, and automobiles.

* financial statements, both personal and for the business.

The business financial statement should be provided for

the last three to five years of operation including a

year-to-date interim report. It should contain a balance

sheet showing business assets and liabilities, and a

profit-and-loss statement showing revenues and expenses.

The lender uses this information to calculate a

debt-to-worth ratio for the business. Be prepared to

provide copies of tax returns for the business for this

same period.

The personal financial statement should list your assets

and your liabilities. Identify the names in which title to

each asset is held and its fair market value. You should be

prepared to provide copies of your personal tax returns.

You may be asked for a list of credit references. Lenders

will check your personal as well as your business credit

rating.

Lenders will carefully examine your financial statements

and business projections. As a borrower, you must be fully

prepared to answer questions about them.

* personal guarantees of the owners or other principals

usually are required, even from an established business.

The lender also may request another party's guarantee such

as a cosigner or a surety, or may request a government

guarantee from the U.S. Small Business Administration or

other government agency.

In addition to the personal guarantee that you give,

under the Equal Credit Opportunity Act the lender is

allowed to require another person's guarantee should your

application fail to meet the lender's standards of

creditworthiness. If all or most of the assets listed on

your personal financial statement are owned jointly with

your spouse, or with someone else, the lender is likely to

require such a guarantee, But the lender may not require

that your spouse be the guarantor,

In the case of secured credit, the lender is allowed to

obtain a spouse's signature on certain documents when the

applicant offers, as security for the loan, property that

the two own jointly, In this case, the spouse or other

co-owner may be asked to sign documents--such as a

mortgage or other security agreement--that would be

necessary under applicable state law to make the property

available to satisfy the debt.

Sources of Technical Assistance

Before you approach a lender, you might want to seek the

advice of another, more experienced "set of eyes" to review your

business proposal, particularly if you are a first-time

borrower. By doing so, you'd be getting the loan package in

shape to make it easier for the lender to reach a favorable

credit decision. There are some business support groups whose

members could counsel you on how your package looks. A qualified

counselor might even discover that you really don't need more

money, and instead suggest better inventory control, improved

marketing techniques, or other changes that could actually solve

your growth problems. One source of counseling available to

small businesses is the Service Corps of Retired Executives

(SCORE), which is sponsored by the U.S. Small Business

Administration. Others might include accountants and financial

advisers.

Once you are satisfied that your proposal is in good shape

to present to a lender, set up an appointment to discuss your

application. You will find that the lender can also be an

excellent source of business and financial counsel.

If Your Application Is Not Approved

Most lenders, banks especially, are conservative in

granting business loans. Given the obligation to their

stockholders and depositors, they need to be sure there's a good

chance the loans they make will be repaid.

If your application for credit is not approved, find out

the reasons why. Some of the reasons that lenders often give

for denying a business loan include, for example, insufficient

owner's equity in the business; lack of an established earnings

record; a history of slow or past-due trade or loan payments;

or insufficient collateral. Finding out the reasons may help

you qualify the next time you apply.

The lender will keep you informed about the status of your

application. If you are considered a "small business" (when

your business revenues are $1 million or less, or when you are

applying to start up a business), a lender has 30 days to let

you know, either orally or in writing, whether or not you get

the loan. The 30-day period begins after the lender has

received all of the information needed to evaluate your credit

request. If your application is denied, the lender must give

you either:

* a written statement of the reasons for denial, or

* a written notice telling you of your right to obtain the

reasons in writing. This notice may be given to you during

the application process or at the time of the denial.

The lender also will keep for one year the records relating

to your application.

Different rules apply for larger businesses (those with

more than $1 million in revenues}. Within a reasonable period

of time after getting all the necessary information on which to

base a decision, the lender must decide and let you know

whether or not you get the credit. Then you'll have 60 days in

which to ask for a written statement of the reasons why you

were denied credit; this is important to remember because the

lender need not notify you of this right. The creditor will

keep records of your application for at least 60 days after

telling you of the credit decision. If you request that records

be kept longer, or ask for a written statement of the reasons

for denial, records will be kept for one year.

Equal Credit Opportunity Act

Obtaining credit can be a difficult process for any

business owner and especially for first-time borrowers. But keep

in mind that different lenders have different standards; if you

did not meet the standards of a particular restitution, you may

still qualify elsewhere. If you have a full understanding of why

the initial lender didn't approve your application, with time

and more attention to these areas, you can improve your proposal

as a result and may succeed the next time you apply.

Women and minority applicants may be concerned that they

have received less favorable treatment which is unrelated to

their creditworthiness. All business applicants have certain

protections against unlawful discrimination under the Equal

Credit Opportunity Act. The Act makes it illegal for lenders to

deny your loan application, discourage you from applying for a

loan, or give you less favorable terms than another applicant

because you are a woman or a minority group member.

Under the law, a lender may not take factors such as sex,

race, national origin, or marital status into account.

In addition, the lender may not ask for information about

your spouse unless your spouse has some connection to the

business, or unless you are relying on your spouse's income to

support your credit application or relying on alimony, child

support, or separate maintenance payments to establish

creditworthiness. But the lender may ask you for information

about your spouse if you are living in, or you are relying for

security on property located in, a community property state

(Arizona, California, Idaho, Louisiana, Nevada, New Mexico,

Texas, Washington, or Wisconsin).

Whether your business is large or small, if you are not

granted the credit, be sure to discuss any questions you may

have with the lender.

If You Need Help

If you are not granted credit by the lender and you believe

the lender may have acted unlawfully, you can seek further

assistance from the regulatory agency that supervises the

institution. A list of some of the agencies is contained in

this brochure for your reference. If it becomes necessary to

seek legal assistance, the Act provides some remedies. If you

have been denied credit because of unlawful discrimination and

are able to prove it, courts may award actual damages and in

some circumstances may impose punitive damages against the

lender. If a lawsuit alleging discrimination is successful, the

court also may award court costs and attorney fees.

Federal Enforcement Agencies

All creditors are subject to the Equal Credit Opportunity

Act (ECOA) and Regulation B (issued by the Federal Reserve

Board), which contains specific rules governing credit

transactions. The following is a list of the federal agencies

that enforce the ECOA and Regulation B for particular classes of

financial institutions. Any questions concerning a particular

financial institution should be directed to its enforcement

agency.

State Member Banks of the Federal Reserve System

Division of Consumer and Community Affairs

Board of Governors of the Federal Reserve System

20th & Constitution Avenue, NW

Washington, D.C. 20551

(202) 452-3946

Non-Member Federally Insured Banks

Office of Consumer Affairs

Federal Deposit Insurance Corporation

550 Seventeenth Street, NW

Washington, D.C. 20429

(800) 424-5488

(202) 898-3536

National Banks

Compliance Management

Office of the Comptroller of the Currency

250 E Street, SW

Washington, D.C. 20219

(202) 874-4428

Federal Savings Association

Consumer Programs Division

Office of Thrift Supervision

1700 G Street, NW, Fifth Floor

Washington, D.C. 20552

(202) 906-6237

Small Business Investment Companies

U.S. Small Business Administration

409 Third Street, SW

Washington, D.C. 20416

(202) 205-6751

Federal Credit Unions

Office of Consumer Programs

National Credit Union Administration

1776 G Street, NW

Washington, D.C. 20456

(202) 682-9640

Finance Companies and Other Creditors Not Listed Above

Division of Credit Practices

Bureau of Consumer Protection

Federal Trade Commission

Washington, D.C. 20580

(202) 326-3224

Alternative Sources of Capital

The U.S. Small Business Administration (SBA), the federal

agency created specifically to assist and counsel small

businesses, suggests the following sources of capital in

addition to banks:

Friends, Relatives, Individuals

Savings and Loan Associations Insurance Companies

Finance Companies

Mortgage Companies

Small Business Investment Companies

Venture Capital Firms

State Government Financing Sources

Pension Funds

Government Agencies (such as SBA)

Private Foundations



.