Английский язык. Практический курс для решения бизнес-задач

Also, keep in mind that you must choose a legal designation – sole proprietorship, partnership, or corporation – and execute the necessary documentation for your small business before approaching a bank or another lender.

Reason to Borrow.

There are three major reasons why businesses borrow; the first and most common reason is to purchase assets. A loan to acquire assets could be for buying short-term, or current, assets – such as inventory – and would be repaid once the new inventory is converted into cash as it is sold to customers. Or, the funds could be for the addition of long-term, or fixed, assets, such as equipment.

The second reason is to replace other types of credit. For example, if your business is already up and running, it may be time to take out a bank loan to repay the money you borrowed from a relative. Or, you may wish to use the funds to pay suppliers more promptly to get a discount on the price of the merchandise.

The third reason is to replace equity. If you wish to buy a partner’s share in your business but you don’t have the cash to do it, you may consider borrowing.

Loan Types.

The purpose of your loan is critical in determining the type of loan you request. You also should make sure that the timing of the repayment schedule on your loan matches the incoming cash flow you will use to make the payments.

There are a number of loan types available to commercial borrowers, including lines of credit, seasonal commercial loans, installment loans, collateralized loans (which are secured with assets), credit card advances, and term loans.

Regardless of the type, most loans have the following features.

Common Loan Features.

– Loans are long term or short term.

– Interest rates vary depending on the term, type, size, and risk of the loan.

– Repayment may be a lump sum or on a monthly or quarterly schedule.

– Payments may be delayed until the funds help your business generate cash flow.

– The loan may be committed, meaning the bank agrees to lend to you under certain terms as you need funds without requiring you to re-apply each time.

– Some loans require that you maintain compensating balance levels in a deposit account.

Loan Agreements.

You also should be aware that the lender will expect you to agree to certain performance standards and restrictions in order to ensure that your business can repay the loan. These restrictions, known as covenants and warranties, commonly include the following:

– Maintenance of accurate records and financial statements

– Limits on total debt

– Restrictions on dividends or other payments to owners and/or investors

– Restrictions on additional capital expenditures

– Restrictions on sale of fixed assets

– Performance standards on financial ratios

– Current tax and insurance payments

The First Step: Preparing Your Business Plan and Loan Request.

When you apply for a business loan, you will need to provide certain information about yourself and your business in the form of a business plan. A business plan can act as an ongoing management guide to help you establish production goals and measure actual performance. Your business plan can help demonstrate to a prospective lender that you have the knowledge, managerial competence, and technical capability to run a successful business.

The Business Plan.

The business plan should include the following sections:

Title page.

Executive summary.

Company description.

Market analysis.

Products and services.

Operations.

Marketing plan.

Ownership.

Management and personnel.

Funds required and expected use.

Financial statements and projections.

Appendices/exhibits.

(See samples of detailed business plan in Exercise 4.).

What the Lender Will Review.

Credit Analysis.

Regardless of where you seek funding – from a bank, a local development corporation, or a relative – a prospective lender will review your creditworthiness. A complete and thoroughly documented loan request (including a business plan) will help the lender understand you and your business. The basic components of credit analysis, the «Five C’s», are described below to help you understand what the lender will look for.

The «Five C’s» of Credit Analysis.

Capacity to repayis the most critical of the five factors. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Credit history is considered an indicator of future payment performance. Prospective lenders also will want to know about your contingent sources of repayment.