Banks and other financial institutions can assist you by providing funds through personal or commercial credit. Examples of personal credit include automobile loans, credit cards, and home mortgages. Commercial credit includes business loans; here are some of the options:
Short-term loans are one of the most common types of business loans and are usually for less than one year. They can provide interim working capital for a business temporarily in need of cash, and are typically repaid in a lump sum when inventory or accounts receivable are converted into cash.
Intermediate-term loans are often used for a business start-up, the purchase of new equipment, expansion, or an increase in working capital. The maturity dates range from one to three years.
Long-term loans generally are made for major capital improvements, acquiring fixed assets, or business start-ups. The term of the loan runs for periods of three to five years and is usually based in part on the life of the asset financed. Repayment is usually made in monthly or quarterly installments.
A line of credit offers you the ability to borrow money repeatedly, up to your credit limit, without having to reapply. A line of credit is particularly important to businesses that experience seasonal fluctuations. The lender generally will perform a review once a year, at which time the borrower is asked to provide updated financial statements.
Applying for commercial credit can be tedious. It calls for more documentation than you might initially have expected and certainly a lot more than when you apply for consumer credit. For lenders, extending credit to an entrepreneur usually means customizing the loan to suit the credit needs of that business. So don’t be disheartened by the amount of paperwork needed to accompany the application. Instead, be prepared!
Among the best assets you can bring to the lender is a well thought-out and documented business proposal. You need to clearly state the purpose of the loan (will the money be used for temporary working capital, buying equipment, or expanding facilities); the amount of funds needed and for how long; and a repayment schedule. Your business proposal should include the following information:
|business description that tells the nature of the business, describes the product and its market, identifies its customers and competition.|
|personal profile that outlines the background and experience of each of the principals in a resume.|
|proposal that states the type of loan requested and its purpose.|
|business plan that outlines your corporate strategy for the next three to five years; it will aid you and the lender in determining whether the business will generate the cash flow needed to repay the loan.|
|repayment plan that tells how you propose to repay the loan or outlines a repayment schedule. The lender will be expecting you to repay the borrowed funds from the profits produced by the business. As a contingency, you might need to develop a plan on how you would repay the loan if the profits alone turned out to be inadequate.|
|supporting documentation will include copies of pertinent papers that support the information contained in your loan proposal—for example, a lease, certificate of incorporation, partnership agreement, letters of reference, contracts, invoices or vendor quotes.|
|collateral that you will use to secure the payment of the loan. Collateral can include business and personal assets such as inventory, equipment, and accounts receivable or real estate, stocks, bonds, and automobiles.|
|financial statements, both personal and for the business. The business financial statement should be provided for the last three to five years of operation including a year-to-date interim report. It should contain a balance sheet showing business assets and liabilities, and a profit-and-loss statement showing revenues and expenses. The lender uses this information to calculate a debt-to-worth ratio for the business. Be prepared to provide copies of tax returns for the business for this same period.
The personal financial statement should list your assets and your liabilities. Identify the names in which title to each asset is held and its fair market value. You should be prepared to provide copies of your personal tax returns. You may be asked for a list of credit references. Lenders will check your personal as well as your business credit rating.
Lenders will carefully examine your financial statements and business projections. As a borrower, you must be fully prepared to answer questions about them.
|personal guarantees of the owners or other principals usually are required, even from an established business. The lender also may request another party’s guarantee such as a cosigner or a surety, or may request a government guarantee from the U.S. Small Business Administration or other government agency.
In addition to the personal guarantee that you give, under the Equal Credit Opportunity Act the lender is allowed to require another person’s guarantee should your application fail to meet the lender’s standards of creditworthiness. If all or most of the assets listed on your personal financial statement are owned jointly with your spouse, or with someone else, the lender is likely to require such a guarantee. But the lender may not require that your spouse be the guarantor.
In the case of secured credit, the lender is allowed to obtain a spouse’s or other co-owner’s signature on certain documents when the applicant offers, as security for the loan, property that the two own jointly. In this case, the spouse or other co-owner may be asked to sign documents—such as a mortgage or other security agreement—that would be necessary under applicable state law to make the property available to satisfy the debt.
Before you approach a lender, you might want to seek the advice of another, more experienced “set of eyes” to review your business proposal, particularly if you are a first-time borrower. By doing so, you’d be getting the loan package in shape to make it easier for the lender to reach a favorable credit decision. There are some business support groups whose members could counsel you on how your package looks. A qualified counselor might even discover that you really don’t need more money, and instead suggest better inventory control, improved marketing techniques, or other changes that could actually solve your growth problems. One source of counseling available to small businesses is the Service Corps of Retired Executives (SCORE), which is sponsored by the U.S. Small Business Administration. Others might include accountants and financial advisers.
Once you are satisfied that your proposal is in good shape to present to a lender, set up an appointment to discuss your application. You will find that the lender can also be an excellent source of business and financial counsel.
Most lenders, banks especially, are conservative in granting business loans. Given the obligation to their stockholders and depositors, they need to be sure there’s a good chance the loans they make will be repaid.
If your application for credit is not approved, find out the reasons why. Some of the reasons that lenders often give for denying a business loan include, for example, insufficient owner’s equity in the business; lack of an established earnings record; a history of slow or past-due trade or loan payments; or insufficient collateral. Finding out the reasons may help you qualify the next time you apply. The lender will keep you informed about the status of your application. If you are considered a “small business” (when your business revenues are $1 million or less, or when you are applying to start up a business), a lender has 30 days to let you know, either orally or in writing, whether or not you get the loan. The 30-day period begins after the lender has received all of the information needed to evaluate your credit request. If your application is denied, the lender must give you either:
The lender also will keep for one year the records relating to your application.
Different rules apply for larger businesses (those with more than $1 million in revenues). Within a reasonable period of time after getting all the necessary information on which to base a decision, the lender must decide and let you know whether or not you get the credit. Then you’ll have 60 days in which to ask for a written statement of the reasons why you were denied credit; this is important to remember because the lender need not notify you of this right. The creditor will keep records of your application for at least 60 days after telling you of the credit decision. If within the 60 day period you request that records be kept longer, or ask for a written statement of the reasons for denial, records will be kept for one year.
Obtaining credit can be a difficult process for any business owner and especially for first-time borrowers. But keep in mind that different lenders have different standards; if you did not meet the standards of a particular institution, you may still qualify elsewhere. If you have a full understanding of why the initial lender didn’t approve your application, with time and more attention to these areas, you can improve your proposal as a result and may succeed the next time you apply.
Women and minority applicants may be concerned that they have received less favorable treatment which is unrelated to their creditworthiness. All business applicants have certain protections against unlawful discrimination under the Equal Credit Opportunity Act. The Act makes it illegal for lenders to deny your loan application, discourage you from applying for a loan, or give you less favorable terms than another applicant because you are a woman or a minority group member.
Under the law, a lender may not take factors such as sex, race, national origin, or marital status into account.
In addition, the lender may not ask for information about your spouse unless your spouse has some connection to the business, or unless you are relying on your spouse’s income to support your credit application or relying on alimony, child support, or separate maintenance payments to establish creditworthiness. But the lender may ask you for information about your spouse if you are living in, or you are relying for security on property located in, a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin).
Whether your business is large or small, if you are not granted the credit, be sure to discuss any questions you may have with the lender.
If you are not granted credit by the lender and you believe the lender may have acted unlawfully, you can seek further assistance from the regulatory agency that supervises the institution. A list of some of the agencies is contained in this brochure for your reference. If it becomes necessary to seek legal assistance, the Act provides some remedies. If you have been denied credit because of unlawful discrimination and are able to prove it, courts may award actual damages and in some circumstances may impose punitive damages against the lender. If a lawsuit alleging discrimination is successful, the court also may award court costs and attorney fees.
Consumer Information Brochures
The Federal Reserve Board's brochures and booklets are suitable for classroom use. Up to 100 copies are available without charge. Additional copies (over 100) are $0.25 each.
Offers ways to protect yourself when seeking help with keeping your home.
Suggests do's and don'ts to manage your credit card account and help maintain a high credit score.
Explains how to obtain your credit report, how credit scores are determined, how to verify reported information, and how to improve and maintain a good credit score.
Explains ways to protect your account from scam artists and tells you who to contact if you notice a problem with your checking account.
Steps to take to protect your home from foreclosure. Also provides links to several websites for additional help.
Describes credit card features and costs, including information about credit card solicitations and applications. Provides guidance on how to file a complaint.
Spanish: Guía del consumidor sobre Check 21 y cheques sustitutos
Describes changes in check processing due to Check 21 and other check-system improvements.
Explains mortgage rate-locks--fees involved, options for setting terms, loan approval process, and lender rate commitments. Provides a list of questions to ask your lender and tips to speed up the approval process.
Helps you answer the questions Should I, Can I, and How do I refinance my mortgage loan? Includes worksheets to help you determine whether refinancing will pay off for you and to help you shop for a mortgage loan to fit your financial situation. Also includes tips to help you through the refinancing process.
Outlines the fees involved in home purchase settlement, including mortgage and lender fees, and charges for establishing and transferring ownership. Provides information on settlement cost estimates and includes a settlement cost worksheet.
Spanish: Guía para el consumidor sobre hipotecas a tasa ajustable (ARM) (Revision forthcoming)
Identifies the basic features of adjustable rate mortgages: adjustment periods, interest rate caps, indexes, and margins. Includes cautions about discounts, payment caps, negative amortization, and prepayments. Provides a glossary of key terms and a checklist to compare mortgage lender rates.
Explains consumer credit laws, how to shop and apply for credit, how to maintain a good credit rating, how to dispute unfair credit transactions, and how to resolve billing errors. Includes a glossary of key terms.
Spanish: Una Guía de crédito comercial para las mujeres, las minorías, y pequeñas empresas
Reviews the credit application process for small business loans and steps to take if a loan is denied. Provides information on the Equal Credit Opportunity Act and gives sources for assistance in the application process.
Provides guidance on shopping for a home mortgage, making an application, and understanding your right to fair lending.
Spanish: Cómo puede un consumidor presentar una queja sobre un banco
Information on the types of complaints that the Federal Reserve investigates and how to file a complaint. Explains the major consumer protection laws that protect individuals.
Spanish: Hipotecas con pagos de interés sólo y préstamos ARM con opción de pago
Explains features of interest-only mortgage payments (I-O mortgage) and adjustable-rate mortgages with the option to make a minimum payment (a payment-option ARM). Includes cautions about payment shock, negative amortization, and prepayments. Provides a glossary of key terms and a shopping worksheet to compare loan features and future rates and payments.
Spanish: Consejos para arrendar un vehículo, Guía del consumidor
Guidance for consumers on leasing a vehicle, including information on consumer rights, a sample leasing form explaining costs, and definitions of terms used in vehicle leasing.
Spanish: Buscando la hipoteca más favorable: Compare, Verifique, Negocie
Guidance on identifying mortgage costs, comparing offers and negotiating the best loan terms. Provides a mortgage shopping worksheet and glossary of key terms.
Guidance on making informed choices about whether to share personal financial information with financial companies. Explains the right to opt out of sharing some personal information and lists the types of personal information that financial companies can share.
Spanish: Protéjase de los cargos por cheques rebotados y sobregiros
Explains courtesy overdraft-protection, or bounce coverage, plans, and the costs involved. Provides guidance on how to avoid overdraft fees.
Spanish: Utilizar su hogar como garantía para un préstamo es arriesgado
Describes how to avoid potential borrowing pitfalls, including high-cost "predatory" home loans, and provides tips for getting the best financing deal possible. Includes a worksheet to use in comparison shopping for a home equity loan.
No. 1: The Board of Governors of the Federal Reserve System
No. 2: The Federal Open Market Committee
No. 3: The Federal Reserve Banks
No. 4: The Federal Reserve Bank Boards of Directors
Details the main elements and functions of the Federal Reserve System.
Illustrates the importance of budgeting, saving, and managing money.
Spanish: Lo que usted debería saber sobre las líneas de crédito con garantía hipotecaria
Information on home equity lines of credit; includes a glossary of terms and a checklist to use in shopping for a plan.
Spanish: Lo que usted debería saber sobre sus cheques
Explains the changes in checking accounts, Check 21 and substitute checks, and electronic check conversion.