_business_Borrowing for Startups_6303_ by wendang


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									business article No.6303
Borrowing for Startups
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    So you have worked hard to come up with a business idea and you think you
have one that is a perfect fit for you. You have done the market research, know
the costs and potential revenue, have the employees you need, and located the
perfect place to house your business. Whew! That was a lot of effort. It should
be a bit easier from here, right?

  Not really. Now you have to make your plan work, and that means you need
money. Do you have enough savings to finance your business for the first year?
Not many people do. So that means you have to borrow the money...and so you
have to visit your banker.

   I have seen many entrepreneurs fail at this point because they do not know
what the banker needs to see. This includes those business owners that think
they know what information the banker needs to see.

  Remember that, when all is said and done, the banker is investing in YOU.
The banker will put money in your business if he feels that you and your
management team can really make the plan a reality. Why? Because if you can
do that, you will be able to earn the money needed to repay your business loan,
and the banker will only lend to you if he is confident he will get the money back
when it is due. If you cannot convince the banker that you can repay the loan,
and repay it on time, you have no chance of getting any money.

   Unfortunately for you, unless you have successfully started and grown a
business already (and even if you have), your business will be perceived as a
very risky investment simply because it is a start-up business. There is nothing
you can do about this; it is the way it is. However, if you acknowledge this fact
and make your banker aware that you know you are a high risk investment, you
will make a better impression. The quickest way to convince a lender that you
are not a good credit risk is to prove that you have no perception of reality.

  You know you are a good risk, but how do you persuade the banker to take a
chance on you? The first step is to have a written business plan. This
demonstrates that you have carefully thought through your business and you
have a plan for making your idea a reality. Bear in mind that the business plan
does not have to be a very thick document, but it should contain certain basic
elements: a description of your target market, the current problem that your
business will solve, how your product or service will solve the problem, the
potential revenue and projected costs, and biographies of the management
team (who, of course, should have sufficient--and relative--experience in the
market you will serve).

  Another thing you can do is to offer collateral to secure your loan. You
actually may not have any choice about this, but it is good for you to know
ahead of time that this will be required. Typically, the bank will use whatever
asset you are financing to secure the loan. So if you need money to tide you
over until your customers pay you, the bank will have a lien on your accounts
receivable. The bank will take a security interest in your inventory if you need to
borrow money to buy stock.

   If you sell services instead of products, then you will not have hard assets, so
the bank will probably have to be satisfied with a personal guaranty, which is
always required on loans to small businesses. You can offset the lack of
collateral by offering a liquid asset, such as a certificate of deposit, to secure
your debt. If you don't have sufficient funds to cash-secure a loan, consider
asking a relative or business associate to put up the money on your behalf.

  Still another alternative is to have an additional personal guaranty, but from a
person or company that is creditworthy.

  Keep in mind that the key decision factor is whether or not you will be able to
generate sufficient cash flow to pay your expenses, earn a profit, and still have
enough cash left over to repay your loan plus accrued interest, on the date the
payment is due. If you cannot convince the banker you can do this, then no
amount of collateral will be sufficient to get your loan approved. And it should
make you reconsider if your business idea really is viable.

   Above all else, be persistent. Submit your request to multiple lenders. Just
because one banker says no, do not assume that all bankers will not have an
interest in you.

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