Western Oregon University
November 21, 2011
Presented by: Elaine Harvey
V.P. Business Development
Wells Fargo Business Banking
• Loans Types & Uses
• What is the Bank Looking For?
• Common Mistakes
Why You Need a CPA
Certified Public Accountants (CPAs) act as advisers to businesses on a wide
range of financial matters. Your CPA can assist with tax preparation, personal
financial planning, auditing services and advice on developing effective
What can a CPA do for you?
CPAs are no longer just number crunchers and tax preparers, they are
business and financial strategists who help chart the paths of businesses.
As technological advances, globalization, new laws and regulations, and
marketplace competition continue to complicate financial and business
decisions, CPAs will be called upon to analyze information, determine effective
financial and business strategies, and help individuals and businesses achieve
Why You Need a Banker
Your banker is a professional who knows about you and your business goals,
strengths and weakness. A good banker should be an intimate with your financial
statements, asking you tough questions about changes and next steps for your
What can a Banker do for you?
A Banker is your free adviser, providing you with solutions to minimize costs,
leverage time and maximize assets. Your Banker should continually partner with you
in order to fully understand the business goals, strategies and challenges. A Banker
should be meeting with you on a regular basis, to ensure things are on track.
How to manager the relationship
A key is to establish lines of open communication with your banker. Treat them as
your friend instead of an adversary. If you are in danger of breaking a covenant, you
could very well have a much better experience if you make the banker aware of the
potential problem than attempting to hide it or delay breaking the news. The earlier
the banker is aware, the more likely it is that they can assist you in mitigating the
problem and finding a suitable solution for you both. In addition, the more trust you
build with your lender, the easier it may be for you to borrow in the future as your
Questions to Consider When
Choosing a Banker
•Will I be assigned a Relationship Manager, and how
accessible are they?
•If I am not assigned a Relationship Manager or I can’t contact
them, is there a call center I can contact? (hours)
•Can the bank’s business banking manager take care of all of
my needs, or will I have to deal with two separate managers
for personal and business banking?
•What tailored packages are available for my industry / line of
•Will I receive value for money i.e. are the products and
services on offer competitively priced?
•For merchant clearing, how quickly do I get paid?
Why you Need an Attorney
As a first step, you need to form your business officially, but how? Consult with
business law attorney to discuss which business structure makes the most
sense for you: a partnership, a limited liability company, a corporation, or one of
the many variations on these basic structures. A business law attorney will
advise you about tax consequences, limitations on liability, formation
requirements, and regulatory obligations of each type of business, and will help
you make a choice that comports with your short-term opportunities and your
What an Attorney can do for you
•Keeping you up-to-date with local and state permitting requirements and other
•Reviewing standard contracts and form releases you use with consumers to
ensure that they provide maximum liability protection
•Drafting special or one-off contracts for business-to-business dealings or
General Loan Information
Business Bank Loans
Business bank loans come in a variety of flavors, from a variety of sources.
For brand-new businesses, or those who might be more of a risk, you’ll want to
know the basics of startup business bank loans.
When a business first starts operation, a business bank loan is often what
keeps things moving.
How do you get a good business bank loan?
Overview of Small Business Bank Loans
The key thing to know about small business bank loans is that you are often
judged on your personal credit.
Building a Foundation for
Business Bank Loans
While we need to work on challenges specific to business bank loans, we
should first make sure that you are a viable candidate for a personal loan.
If you haven’t already, you need to build a credit history to give banks an idea
of how responsible you are. Also, you need to know what they see when they
pull your credit for a business bank loan. Take advantage of the U.S.
government’s free credit report program – and continually monitor your credit
Over time, you'll want to build credit for your business and stop using personal
credit. Business credit is similar to personal credit, but it's important to have
both. Keeping things separate can help protect (and build) the value of your
business, and your personal assets will be safer as well.
A popular funding option is taking money out of a 401(K) or another retirement
fund account. Similar to your personal savings, the money is yours and there is
usually minimal paperwork required to withdraw the funds. On the downside,
removing funds from a 401(K) and similar accounts, often carry penalties for
early withdrawal. It's not uncommon to lose a portion of the money as part of
the withdrawal penalty, in addition to paying taxes on the amount used. There
are some exceptions (based on age and intended use of the money) that can
lighten the tax burden, but it's best to discuss these options with a professional
tax advisor before taking the money out of your account.
• Credit Cards
Credit cards are considered one of the quickest and easiest means of
borrowing money. In most instances, entrepreneurs use their personal credit
cards. Later, business accounts can be opened to cover ongoing financing
challenges. While credit cards are an easy solution, they do come with risks, as
well. Varying interest rates and high credit limits can cause your debt to mount,
rapidly. Even a credit card that starts at a low, introductory rate can quickly rise,
especially if you are late on a single payment. If you should continue to build
credit card debt, and begin to falter on payments, it can negatively impact your
personal credit rating, making it more difficult to secure other funding options in
Borrow from family, friends, colleagues, or
employees . An alternative to this is to have
one of the aforementioned cosign a bank
loan for you.
Risk : Meddling lenders, constantly
reminding you of what they gave you; ruined
Bank Term Loan
A loan from a bank for a specific amount that has a specified repayment
schedule and a floating or fixed interest rate. Term loans almost always mature
between one and 10 years. (Real Estate 15-20 years)
For example many banks have term-loan programs that can offer small
businesses the cash they need to operate from month to month. Often a small
business will use the cash from a term loan to purchase fixed assets such as
equipment used in its production process.
Generally need to be in business for 3 years, with a positive cash flow.
Line of Credit
Business lines of credit help companies better manage
their cash flow. The credit lines can be used to pay
suppliers and other expenses while waiting for your
customers to pay you. Taking advantage of early pay
discounts will usually offset the interest paid to the bank.
Make sure you know and understand the banks loan
covenants. Lines of credit should be fluid and brought to a
zero balance per loan agreement.
SBA Loan - 504
The CDC/504 loan program is a long-term financing tool, designed to encourage
economic development within a community. The 504 Program accomplishes this by
providing small businesses with long-term, fixed-rate financing to acquire major fixed
assets for expansion or modernization.
A Certified Development Company (CDC) is a private, nonprofit corporation which is set
up to contribute to economic development within its community. CDCs work with SBA
and private sector lenders to provide financing to small businesses, which accomplishes
the goal of community economic development. Typically, a CDC/504 project includes:
A loan secured from a private sector lender with a senior lien covering up to 50 percent of
the project cost
A loan secured from a CDC (backed by a 100 percent SBA-guaranteed debenture) with a
junior lien covering up to 40 percent of the project cost
A contribution from the borrower of at least 10 percent of the project cost (equity)
SBA Loan - 504
How 504 Loan Funds May Be Used
Proceeds from 504 loans must be used for fixed asset projects, such as:
•The purchase of land, including existing buildings
•The purchase of improvements, including grading, street improvements,
utilities, parking lots and landscaping
•The construction of new facilities or modernizing, renovating or converting
•The purchase of long-term machinery and equipment
The 504 Program cannot be used for working capital or inventory,
consolidating or repaying debt, or refinancing.
Use of 7(a) Loan Proceeds
If you are awarded a 7(a) loan, the loan proceeds may be used to establish a
new business or to assist in the acquisition, operation, or expansion of an
Eligible Use of 7(a) Loan Proceeds Include (Non-Exclusive):
•The purchase land or buildings, to cover new construction as well as expansion
or conversion of existing facilities
•The purchase of equipment, machinery, furniture, fixtures, supplies, or
•Long-term working capital, including the payment of accounts payable and/or
the purchase of inventory
•Short-term working capital needs, including seasonal financing, contract
performance, construction financing and export production
•Financing against existing inventory and receivable under special conditions
•The refinancing of existing business indebtedness that is not already structured
with reasonable terms and conditions
• To purchase an existing business
SBA loans cannot be used for these purposes:
• To refinance existing debt where the lender is in a position to sustain a loss
and SBA would take over that loss through refinancing
•To effect a partial change of business ownership or a change that will not
benefit the business
•To permit the reimbursement of funds owed to any owner, including any
equity injection or injection of capital for the business's continuance until the
loan supported by SBA is disbursed
•To repay delinquent state or federal withholding taxes or other funds that
should be held in trust or escrow
•For a non-sound business purpose
SBA – Business Acquisition
• Loans up to $1,750,000
• As low as 15% down payment
• Loans amorized up to 10 years
• Emphasis placed on business cash flow
• Competitive rates
• Collateral can include business and/or
SBA – New Business
• $25,000-$1,750,000 to start a new
• Minimum 30% cash down payment
• Terms up to 10 years
• Fully amortized, principal & interest
• Fixed & adjustable rates available
• Collateral can include business and/or
What is the Bank Looking For?
Five C’s of Credit Why?
The “5 C’s of credit” are a
1. Cash Flow
common reference to the
2. Collateral major elements of a
3. Capital banker’s analysis when
4. Character considering a request for a
5. Conditions loan
Breakdown of the 5 C’s
• Cash flow is KING • Collateral
Your banker needs to be certain that In most cases, the bank wants the
your business generates enough loan amount to be exceeded by the
cash flow to repay the loan that you amount of the company’s collateral.
are requesting. In order to determine The reason the bank is interested in
this the banker will be looking at your collateral is as a secondary source of
company’s historical and projected repayment of the loan. If the company
cash flow and compare that to the is unable to generate sufficient cash
company’s projected debt service flow to repay the loan at some point in
requirements. the future, the bank wants to be
For a start up your projections are comfortable that it will be able to
critical for determining cash flow. The recover its loan by liquidating the
banker will use peer analysis as a tool collateral and using the proceeds to
to assist with the realism of pay off the loan.
Breakdown of 5 C’s
• Conditions • Capital
Overall environment that the company The bank is essentially looking for the
is operating in. The banker is going to owner of the company to have sufficient
assess the conditions surrounding your equity in the company. Capital is
company and its industry to determine important to the bank for two reasons.
the key risks facing your company, and First, having sufficient equity in the
also, whether or not these risks are company provides a cushion to
sufficiently mitigated. Even if the withstand a blip in the company’s ability
company’s historical financial to generate cash flow
performance is strong, the bank wants Secondly, when it comes to capital, the
to be sure of the future viability of the bank is looking for the owner to have
company. The bank won’t make a loan sufficient “skin in the game”. The bank
to you today if it looks like the viability wants the owner to be sufficiently
of your company is threatened by some invested in the company such that if
unmitigated risk that is not sufficiently things were to go wrong, the owner
addressed. would be motivated to stick by the
company and work with the bank during
Breakdown of 5 C’s
I left “Character” for last, it is by no means the least important of the 5 C’s of
Credit. Arguably it is the most important. Character gets to the issue of people –
are the owner and management of the company honorable people when it
comes to meeting their obligations? Without scoring high marks for character,
the banker will not approve your loan.
How does a banker assess character? After all, it is an intangible. It is partly fact-
based and partly “gut feeling”. The fact-based assessment involves a review of
credit reports The bank may also communicate with your customers and vendors
to assess how you have dealt with these business partners in the past. The soft
side of character assessment will be determined by how you deal with the
banker during the application process and their resultant “gut feeling”.
In the end, bankers want to deal only with people that they can trust to act in
good faith at all times - in good times and in bad. Banks want to know that if
things go wrong, that you will be there and do your best to ensure that the
company honors its commitments to the bank. Even if the company’s financial
profile is strong and the company has scored well in all of the other “Five C’s of
Credit”, the banker will turn down the loan if the character test is failed.
Would the sole reason you would be starting your own business be that
you would want to make a lot of money? Do you think that if you had your
own business that you'd have more time with your family? Or maybe that
you wouldn't have to answer to anyone else? If so, you'd better think again.
On the other hand, if you start your business for these reasons, you'll have a
better chance at entrepreneurial success:
•You have a passion and love for what you'll be doing, and strongly believe -- based on educated
study and investigation -- that your product or service would fulfill a real need in the marketplace.
•You are physically fit and possess the needed mental stamina to withstand potential challenges.
Often overlooked, less-than-robust health has been responsible for more than a few bankruptcies.
•You have drive, determination, patience and a positive attitude. When others throw in the towel,
you are more determined than ever.
•Failures don't defeat you. You learn from your mistakes, and use these lessons to succeed the
next time around
•You thrive on independence, and are skilled at taking charge when a creative or intelligent
solution is needed. This is especially important when under strict time constraints.
•You like -- if not love -- your fellow man, and show this in your honesty, integrity, and interactions
with others. You get along with and can deal with all different types of individuals
Many a report on business failures cites poor management as the number one
reason for failure. New business owners frequently lack relevant business and
management expertise in areas such as finance, purchasing, selling, production,
and hiring and managing employees. Unless they recognize what they don't do
well, and seek help, business owners may soon face disaster. They must also be
educated and alert to fraud, and put into place measures to avoid it.
Neglect of a business can also be its downfall. Care must be taken to regularly
study, organize, plan and control all activities of its operations. This includes the
continuing study of market research and customer data, an area which may be
more prone to disregard once a business has been established.
A successful manager is also a good leader who creates a work climate that
encourages productivity. He or she has a skill at hiring competent people, training
them and is able to delegate. A good leader is also skilled at strategic thinking,
able to make a vision a reality, and able to confront change, make transitions,
and envision new possibilities for the future.
A common fatal mistake for many failed businesses is having insufficient operating
funds. Business owners underestimate how much money is needed and they are
forced to close before they even have had a fair chance to succeed. They also may
have an unrealistic expectation of incoming revenues from sales.
It is imperative to ascertain how much money your business will require; not only
the costs of starting, but the costs of staying in business. It is important to take into
consideration that many businesses take a year or two to get going. This means
you will need enough funds to cover all costs until sales can eventually pay for
Location, Location, Location
Some factors to consider:
•Where your customers are
•Traffic, accessibility, parking and lighting
•Location of competitors
•Condition and safety of building
•Local incentive programs for business start-ups in specific targeted areas
•The history, community flavor and receptiveness to a new business
Lack of Planning
Anyone who has ever been in charge of a successful major event knows that were
it not for their careful, methodical, strategic planning -- and hard work -- success
would not have followed. The same could be said of most business successes.
It is critical for all businesses to have a business plan. Many small businesses fail
because of fundamental shortcomings in their business planning. It must be realistic
and based on accurate, current information and educated projections for the future.
Components may include:
•Description of the business, vision, goals, and keys to success
•Work force needs
•Potential problems and solutions
•Financial: capital equipment and supply list, balance sheet, income statement and
cash flow analysis, sales and expense forecast
•Analysis of competition
•Marketing, advertising and promotional activities
•Budgeting and managing company growth
A leading cause of business failure, overexpansion often happens when business
owners confuse success with how fast they can expand their business. A focus on
slow and steady growth is optimum. Many a bankruptcy has been caused by rapidly
At the same time, you do not want to repress growth. Once you have an
established solid customer base and a good cash flow, let your success help you
set the right measured pace. Some indications that an expansion may be warranted
include the inability to fill customer needs in a timely basis, and employees having
difficulty keeping up with production demands.
If expansion is warranted after careful review, research and analysis, identify what
and who you need to add in order for your business to grow. Then with the right
systems and people in place, you can focus on the growth of your business, not on
doing everything in it yourself.
Simply put, if you have a business today, you need a website. Period.
In the U.S. alone, the number of internet users (approximately 77 percent of the
population) and e-commerce sales ($165.4 billion in 2010, according to the US
Department of Commerce) continue to rise and are expected to increase with each
At the very least, every business should have a professional looking and well-
designed website that enables users to easily find out about their business and how
to avail themselves of their products and services. Later, additional ways to
generate revenue on the website can be added; i.e., selling ad space, drop-
shipping products, or recommending affiliate products.
Remember, if you don't have a website, you'll most likely be losing business to
those that do. And make sure that website makes your business look good, not bad
-- you want to increase revenues, not decrease them.
When it comes to the success of any new business, you -- the business owner --
are ultimately the "secret" to your success. For many successful business owners,
failure was never an option. Armed with drive, determination, and a positive
mindset, these individuals view any setback as only an opportunity to learn and
Do’s & Don’ts
• Make an appointment & allocate enough time
• Tell it straight, good & bad
• Be prepared
• Ask questions if you do not understand something
• Have a definite plan, but be flexible
• Keep your banker informed
• Negotiate rates AFTER you have presented the loan request
• Be impatient
• Make promises you can not keep
• Ask “how much” you can borrow
• Negotiate interest rates over the telephone
• Spend the money BEFORE you ask for it
• Change banks solely for a better interest rate, unless your bank is not
• Ever surprise your banker