1. From your experience, what do you see as the most common method for retrieving funding for a new business?
-In an ideal world, you’d start your new business with cash. Obviously, for the vast majority of us that isn’t feasible. In my line of work, we have taken out business loans whether it be to start a new company, acquire land/buildings, or do improvements. I would say the majority of new business owners go this route, normally taking “small business loans” in order to start their business. It’s an investment yes, but a worthy one. There are also many different options when it comes to bank loans as well. We see small business loans as the typical go-to. I’m speaking for Ohio but there are also business loans available through different economic institutes. For instance if you live in a rural area and want to start a business there is funding for that, and at times those loans requirements can be a little more lenient (lower credit scores accepted etc)
2. For people that are seeking loans from the bank, what are some qualities that bank lenders are looking for in businesses before agreeing to fund?
-I’ve always been told there are 5 areas that banks investigate when agreeing to fund loans. However, they don’t all hold the same weight. Your credit score here is key, and it’s normally the first thing banks look at. Credit scores range from 300 to 850 and they consist of timely payments, credit utilization rates, the type of accounts you have, total debt, and inquires on your credit report. Each of these hold different weight when it comes to your score. Most importantly of these is your
payment history. Pay those bills on time! Next we have cash flow and your projections. Normally a bank will ask for projected numbers for the coming year. Take for instance housing. You would put together a rent roll given how many units you have and the potential income for each unit. Normally you
go in at anywhere from a 60 to 80% occupancy percentage unless you have 1 or 2 units. Your hope is to be at max capacity but banks won’t loan on that number. In looking at projections for other areas (I.e. restaurants) you would look at comparable numbers with similar businesses and present that to the bank. Think of it as an investor buying into your company. Buying into your idea. Banks will also look at what collateral you have available to put up against the loan or if you have any funding to put in beforehand. This limits their liability. With more funding or collateral (I.e. owned home/land) they have something to fall back on and make
approval easier. We would then need statements for the banks. Personal income statements, tax returns, any plans you have for your business. This follows into the final “key” to what a bank looks for: character. In any relationship character is important. When you meet your potential lender they are reading you like they are reading your statements. Unfortunately this isn’t the most crucial aspect of you application. You can’t just be a nice person and get approved. The documentation is needed too for it to “make sense” Your character won’t get you a loan but it will definitely kill it.
3. What are some hurdles that people run into when seeking financial support?
– I’ve found the most common hurdles stem from potential business owners not knowing about their credit score. They have may debts they didn’t know about. Their credit utilization may be too high and then it can snowball from there. I also see issues when it comes to producing the proper paperwork. You’ll feel like banks want to know what you had for breakfast before they approve you. I’ve sent documents over again and again and that hurdle can be overwhelming and frustrating at times.
4. Have you seen any issues with people asking family for funds?
– This is a tricky subject. In my opinion if you could ask family for funding you should. It’s never a bad thing to ask for help. I would think I’d give anyone I loved my last dollar if they needed it. Especially if it was for their future and their business. You do at times see when pride kicks in. People wanting to do it themselves or being afraid to ask for help. I would never encourage anyone to not take help from family with funds because the amount of money you’ll save when it comes to interest on a lower loan vs. a higher loan is substantial.
5. How effective are grants? Are they worth the time to apply to achieve funds?
– Grants are underutilized and this is unfortunate. Let me ask you. If you had to take a similar amount of time to apply for grant funding than you are with a loan and you had a chance for it why wouldn’t you? The amount of grant money that isn’t used is astounding. This isn’t without its drawbacks. Most grant funding will go towards businesses already established or at least in the process. With grant funding, these monetary awards are given out in hopes of furthering an idea or business. That being said, grants take time to be awarded and typically only allow applications once a year at different times for different programs. The good news is the amount of different grants available range by state and concept. There are literally hundreds out there in your state.
6. What are some limitations or drawbacks from taking out a bank loan?
– The limitations truly stem from being able to get the funding. It’s not an easy process to attain a bank loan and this can take time. That’s another limitation. You’re not likely to go into the bank and leave with the money needed. If you are ready and needing to start immediately then a loan may not be the best option. Expect AT LEAST a month for funding. Then sometimes you can be waiting weeks for payments (loan funds) to come in to pay companies, or put in orders for items you need. When we get into drawbacks its simple. Interest rates. You’ll be paying more, sometimes much more, than you are getting when you take out a loan.
7. At what point should someone consider moving from bootstrapping to achieving a higher
level of funding?
-This all would depend on what kind of business you want to build. If you have savings and a building in place, then I would suggest that route. Again it depends what you want to do? Say you want to put in a coffee shop in a building you own and have a substantial savings. By all means, start there. You can always move into business loans at a later day. Also if you have some of the project established then this will look better when/if you go to apply for a loan. Don’t clear out all of your funds though, it’s commonplace for issues to arise and for things to take more time than they should. Budget for that.
8. What are some things required in order to take out a bank loan?
– As I said earlier, you’ll need financial documents. You’ll need personal income statements, any statements with debt you may already have. Plans for your potential
business. Proof of identification. Sometimes you may need a co-signer if your credit isn’t as high as the bank would like.
9. What advice would you give to someone before meeting with a bank lender?
– I say this on any kind of meeting or interview. Come prepared and dress up. I’ve had countless interviews with people that aren’t dressed even remotely put together and that is horrible starting things off. First impressions are key and your character is factored into getting a bank loan. I’m not saying go get a glamorous dress or rent a tux, but come looking professional. Look who you’re talking to in the eyes and be invested in the conversations. This is for YOUR business not theirs. In coming prepared, have your information with you if you can. Have an idea of your credit score. If it’s on the lower end, be ready to fight for your loan and explain why you should still be given funding. There are options for everyone. Most importantly, breath and don’t give up. You may get denied once, you may get denied a hundred times, but that doesn’t mean that’s the end of the story. Keep pushing for the business you want and your dreams.
