your investigation of commercial and government loan programs, don’t neglect one of the most common sources for loans: friends and family. Many, perhaps most, new businesses are funded by family members. Often, the best place to borrow money is from relatives. But sometimes, the worst place to borrow money is from relatives. On the one hand, who is more likely to appreciate your vision or to want to see you succeed than your family? On the other, if your business doesn’t succeed, you will lose not only your money but that of the family member who invested in you. Think through the long-term implications of borrowing from family.
If you decide to use a relative’s or friend’s money, treat the loan as an “arm’s-length transaction,” the same as you would if it were from a bank. Give them your business plan. Decide the amount of interest and the payback schedule. Make sure the arrangement is in writing. Then stick to the terms as though your future family relations depended on it.
Sometimes a family member who cannot give you cash will be willing to cosign a commercial loan. Again, be sure you don’t stick them with your bad management. A cosigner is equally responsible for the loan repayment. If you can’t repay your debt, they must.
Apply for a Loan
One of the best ways to boost your chances for getting a bank loan is to do some groundwork before you apply. Learn about banking procedures, policies, and constraints. Put together a business plan that anticipates what the loan officer will need from you. Banks typically have an application form they want you to fill out. But applying for a loan involves more than just filling in all the blanks. Put some time and effort into your business plan. Doing so will help you stand out from other loan applicants.
Compile the evidence you need to present yourself as a good credit risk. What does a good risk look like?
1. You are someone of good character. You are willing to work hard. You have a proven reputation as a responsible citizen.
2. You have what it takes to run the business. Your credit report shows you have a good track record when it comes to handling money. You have the business skills—acquired through education, practical experience, or both—that you need to make the business a success.
3. You have quite a bit of your own money invested. By investing your own money, you show that you are likely to work to build your investment and theirs.
4. You have collateral to support your primary repayment source.
If any of these statements aren’t true, you may need to find an alternate source of funding. If all of them are true, make sure you have the evidence to show your lender.
A word on credit reports: Expect your lender to check yours. Before you apply for a loan, before your lender points out credit trouble, order a copy and address any problems that might be on it. The largest supplier of consumer and business credit reports is Experian (formerly TRW Information Systems). If you wish to purchase a copy of your credit report using a credit card, you can call them 1-888-EXPERIAN. They can get you a copy in about a week. They also have mail-order forms available on their Web site. If you need help reading your credit report, or if you need to repair poor credit, the Experian Web site (www.experian.com) has information to get you started.
When you’ve thought through the questions your loan officer might ask and put together your loan application in a neat, easy-to-read format, it’s time to present it. Make an appointment. Dress professionally. Show up on time. Allocate enough time that you don’t need to be looking at your watch during the interview. Present your request clearly and honestly. Ask questions if you don’t understand something.
Expect your lender to ask for three sources of repayment: standard repayment, collateral, and a personal guarantee. You probably plan to repay your loan with the proceeds of your business. Expect to prove that you can do so. Expect also to be asked for collateral. Loans in which assets are pledged as collateral are called “secured loans.” If yours is a secured loan, and you aren’t able to pay off the loan, the bank takes over ownership of the asset you’ve pledged. Small business loans are often secured loans. If you don’t have collateral, you may find that getting a loan is more difficult. Don’t necessarily assume, however, that it’s impossible.
Besides collateral, your lender may also ask for some form of personal guarantee from you, the owner of the business. In other words, if you cannot repay the loan from the proceeds of your business, you must repay it from personal funds.
You may ask, “Do they really need three sources of repayment?” Perhaps not from a mere bookkeeping point of view. What they really need, what they secure by asking for three forms of repayment, is the assurance that you are motivated to repay your loan. You have to admit that the thought that they could tap into your assets or even your personal bank account is a powerful motivator. By allowing them three sources of repayment, you prove that you are both able and highly committed to repay your loan.
When applying for a loan, you will, of course, want to be as persuasive as possible. But never do so at the expense of the truth. Do not inflate your assets or your projections. If anything, underestimate your projections. Why? Not only is it unethical to overstate your financial status, it’s illegal.
On the flip side, the federal government has protected your right to apply for credit. The Equal Credit Opportunity Act (ECOA) says no one may deny you credit based on sex, marital status, race, national origin, religion, age, or receipt of public assistance income. Neither can the bank refuse to lend you money based on the personal traits of potential customers. The ECOA doesn’t guarantee that you will get a loan, only that you will not be discriminated against in the loan process. If you want more information, contact the Federal Trade Commission.
A little advance planning can save you a lot of financial worry over the years. First, make careful, realistic estimates, always allowing enough buffer for emergencies and unforseen expenses. Break down your budget in terms of number of students needed and target enrollment. Work up a detailed business plan, and develop both short-term and long-term goals. Then find the most appropriate financial partner available to you. If you learn the basics of financing a small business before you start spending money, you can build your school on a solid financial foundation right from the start.
CHAPTER THREE:
L AY THE BUSINESS GROUNDWORK
Assemble Your Team of Advisors
Running a small business means doing a variety of jobs. The life of your business requires you to make professional decisions about everything from finance to dealing with the government, from insurance coverage to advertising. How do you do it all well? You get help.
You need to have a relationship with an accountant, an attorney, and a banker, before you need them. These business professionals have specialties. You will want yours to be familiar with the needs of a small service business.
Don’t be afraid to interview several accountants, attorneys, and bankers before choosing one. Make sure your advisors have experience with the kinds of things you need them to do. Make sure, also, that they have the same philosophy of business you do. For example, if you want to pursue every possible income tax deduction, you don’t want an extremely conservative accountant. If you are running a small business, you don’t want an attorney who works only for multinational conglomerates and considers your small businesses a waste of time. Find advisors who share your values and understand your business priorities. Look at who they have as clients. Does your business fit in with their client
