Financing with a Commercial Loan

Banks and other lenders are for-profit companies that pay for their salaries, buildings, utilities, etc. by loaning out their depositor’s money. Banks operate on the difference between the interest they pay to bank depositors and the interest they get from the bank’s investments, including loans. Market forces keep this differential fairly small, so banks avoid risky investments.

A start up business with an untested owner is a risky investment; particularly if the owner does not have a lot of money. Presenting a commercial loan officer with a solid business plan reduces that risk by demonstrating that an appropriate level of research has been done and that everything has been done to identify and reduce risk. There is a old motto: "The risk determines the rate." As the risk increases, so does your interest rate, so a plan that shows how you will manage risk becomes even more important.

What do lenders look for when making decisions about term loans? Well, the "five C's" continue to be of utmost importance.

Character: How have you managed other loans (business and personal)? What is your business experience?

Credit capacity: The bank will conduct a full credit analysis, including a detailed review of financial statements and personal finances to assess your ability to repay.

Collateral: This is the primary source of repayment. Expect the bank to want this source to be larger than the amount you're borrowing.

Capital: What assets do you own that can be quickly turned into cash if necessary? The bank wants to know what you own outside of the business—bonds, stocks, apartment buildings—that might be an alternate repayment source. If there is a loss, your assets are tapped first, not the bank's. Banks like to lend to people who already have money. You will most likely have to add a personal guarantee too.

Comfort/confidence with the business plan: How accurate are the revenue and expense projections? Expect the bank to make a detailed judgment. What is the condition of the economy and the industry.

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