A Guide To Loans

Know Your Profits, Losses

Even if a current business has been marginally profitable, or even losing money, there is still hope; however, it will not be easy. Banks are trained to make decisions primarily based on a company’s ability to generate sufficient cash flow through consistent profitability.

If a business has lost money, you need to know the reason for the loss. The losses may be caused by the economy, health, labor problems or even the weather. The bank will want to know what changes you will make in order to fix these problems.

The most important aspect to the bank is the income and profit a business reports on its tax returns. If business owners engineer their profits so they pay little taxes, it is hoped that they have saved this cash, because they will not get a bank loan without a sound profit and loss statement for their business. Remember, hiding income from the government when filing your taxes will only hurt you when applying for a business loan. In addition, keep in mind a loan officer never wants to hear, "My tax return doesn’t reflect what I actually make. I make double that in cash." This certainly will not give the right impression and will guarantee a decline of the loan.

Collateral

Small business owners often complain that lenders lack an adequate understanding of the market value of assets such as equipment and inventory. Many times this is true. Bankers are not experts on most of the collateral against which they lend.

Don’t expect the bank to lend dollar-for-dollar against the collateral given, no matter what is being pledged. Banks have certain guidelines they follow in setting loan-to-collateral value ratios and generally will lend no more than 70 percent to 80 percent of the value of real estate, equipment and accounts receivable, and 40 percent of inventory.

A salon owner may have personal assets such as debt-free automobiles, bank certificates, stocks or real estate that could be used to secure a loan. It is guaranteed the bank will ask to secure your entire business and usually will look for other avenues outside the business, as well as personal assets, for collateral. You must address these issues before applying for a loan because an unsecured loan almost is impossible to find in today’s banking world.

Personal Guarantees

Most banks will not loan to any business without personal guarantees from the owner(s). The purpose of a guarantee is to provide a secondary repayment source for the loan in the event the small business is unable to pay. What this means is if a salon owner borrows $10,000 and defaults on the loan, the bank personally can go after said salon owner for the balance of the loan. If the salon owner doesn’t have the money, the bank has the right to seize any personal assets that equate to the amount of the loan.

As a matter of policy, banks ask for the owner(s)’ personal guarantees. This demonstrates a full commitment on their part that will enhance a salon owner’s chances of getting a loan approval. If a salon owner shows any reluctance by asking the bank if a personal guarantee is necessary, it will throw up a red flag and show that the salon owner is unsure of his or her business plan and ability to repay the loan. Putting this thought in any banker’s mind automatically will decline the loan.

Applying for a small business loan is not an easy process. Banks are not in business to lose money: that is why procedures have become so arduous—they do not want any risky propositions. However, if you are prepared to answer these common objections, you will improve your chances of obtaining the financing you need. Good preparation and showing the confidence in your ideas as an owner will help establish the credibility necessary to convince a bank that you have the business sense and what it takes to be a successful business owner.