Qualifying
Any name that appears on a loan will need to provide personal credit history including a credit check, even if it is for a business. Therefore it is worthwhile to obtain a copy of your credit report (available free) and ask a lender in advance what you can do to raise your score or look more favorable. Unsecured loans are available to personal and commercial applicants, but have extremely high interest rates and are difficult to qualify for as lenders only look at personal credit and employment history. Secured loans backed by collateral are much more appealing in terms and rates.
Personal
There are several varieties, but very specific for their purpose: auto, credit card, line of credit, student loans, boat, debt consolidation, etc. Each has different terms and rates. Information is easily obtained from any bank or credit union.
Residential
See Mortgages
Commercial
New businesses are asked to provide market studies and reasons they will succeed. The banks are hesitant to loan money as there is a high failure rate in the field. For businesses already in operation, many lenders accept assets in the form of accounts receivable, inventory and/or equipment as collateral. Other forms include home equity and real estate for new business. Small Business Administration backed loans are usually offered as Adjustable Rate or Balloon Mortgages with 20-30% in liquid capital to qualify. Business credit cards are issued to owners to separate personal and business expenditures. Also, line of credits can be established for operating entities. Another option to raise capital is to sell shares of stock in the company (see Private and Public Stock for more information).
Small Businesses
- Established: Bring personal credit history, bank statements from business, pro forma for future growth and an updated business plan. Banks do not like to take risks on small businesses, so be prepared to present the strong points of the business and yourself to win them over. Existing businesses have a stronger chance of getting a loan than most start ups; however, there is no guaranty for the bank to fall back on. If the banks or credit unions deny the loan, read below for other ideas.
- Start up: The Small Business Administration website or local office is the best place to start. Their goal is to help small businesses get started and succeed. Although they do not give loans, they pre-qualify borrowers who can then find a commercial lender easier (if you default, the SBA and bank are responsible so banks are more willing to take a risk—you still are responsible for repayment to both parties). SBA backed loans usually require 20% down payment. If the banks or SBA aren't willing, another source is a venture capitalist. They might offer a higher interest rate, but it may be worth it.
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