At some point, you may be ready to launch a business or expand your current operations. Maybe you’re thinking about buying into a franchise or acquiring an existing business. Whatever your goal, it’s important to understand your financing options. Too often entrepreneurs limit themselves because they’ve been misinformed. In my role as director of the Zions Bank Business Resource Center, I often hear these ten common myths about business bank loans:
If I need a business loan, I’ll get one from the SBA. The U.S. Small Business Administration, or SBA, does not make loans. The SBA program offers loan guarantees to participating preferred or approved lenders to encourage banks and other financial institutions to provide financing for startups and established businesses that meet certain eligibility requirements.
SBA loans are only for new businesses. Established businesses may wish to use SBA financing instead of pursuing a conventional loan when longer terms, blended terms or different collateral requirements are desired. It’s worth talking to a banker to find out what may be the best fit for you. a
Banks don’t fund startup loans. I can’t tell you how often I hear this, and it simply isn’t true. Banks like Zions do provide funding for startups and new businesses through SBA-backed loans. However, you must have a well-thought-out and researched business plan that addresses the unique product or service solution you will offer the marketplace. Be ready to share how you will find customers, make and sustain sales, what you estimate your revenues and expenses to realistically be, and why your leadership team has the experience and skills to execute the concept.
Banks don’t fund small loan requests. I was teaching a workshop recently and a participant raised his hand and asked, “What if I just need a small loan, say $20,000. You don’t do loans that small, right?” Wrong. Whether you’re looking for $5,000 or $5,000,000, banks are interested in helping you find the right loan product to finance your need.
The bank will provide 100 percent financing for my project. The truth is, you need “skin in the game.” You must demonstrate to the bank that you have already contributed money to the business or that you have cash to bring to the table. Putting some of your own capital at risk alongside the bank’s loan funds demonstrates your serious commitment to the success of the venture.
A loan will take a lifetime to close. The time it takes to process a loan depends on a variety of factors, including how quickly you and your team respond to the bank’s requests for information or documents and how many outside parties (contractors, appraisers, etc.) may be involved. The bank is just as excited about your loan request as you are, but taking a little time upfront to get things done right will lead to a better overall experience and outcome. Discuss expectations and deadlines early on when you meet with your banker.
I’m buying an existing business or a franchise, so I’m not a startup. Even if you are purchasing a company that’s been around for 40 years and expect to keep everything the same, it’s your first time in the driver’s seat running this operation. Realize that the business’s successful history was based on someone else’s reputation, actions and relationships. Will trusted employees exit when a new leader takes over? Will customers remain loyal? Will you have the same favorable terms with suppliers? Can you follow the “recipe” exactly as the franchisor has set up? These are a few examples of unknown variables when ownership changes hands. That’s why you will be viewed as a startup, even when acquiring an established business or franchise.
Loans don’t require a personal guarantee. If you’re interested in bank financing, expect to be asked to personally guarantee the loan. Remember: as the business owner, you are expected by the bank to implement your business plan to achieve the profits you said were attainable in your financial projections.
What the bank doesn’t know will help me to get the loan. Do you have credit card debt, a bankruptcy or other material, relevant information in your past or present situation that you don’t plan to disclose? Think again. The truth always has a way of coming out, and one of the factors banks consider in making a loan decision is the character of the borrower. It’s better to discuss any potential issues with your banker early on. Perhaps there is a way to mitigate or explain the situation to bank underwriters. Maybe the best course of action is to wait and pay down debt before taking on another obligation. A good banker wants what is best for you.
I either have to get a bank loan or pursue investor funding. You can explore and use a combination of funding methods to start or grow your business.
Determining how to fund your business startup or your existing company’s growth is an important decision. Get the facts about bank financing before you jump to conclusions or mistake myths for truth. Make an appointment with a local lender and get your questions answered.
Karen Appelgren is vice president and director of the Zions Bank Business Resource Center in Boise. To contact Karen, call (208) 501-7449 or email [email protected]