Every bank will be different BUT one thing is universal – banks don’t actually loan to start-up businesses. Instead, they enlist the Small Business Administration, a faction of the federal government, to guarantee the loan. This means that your bank will follow not only their system of checks and balances when choosing companies to invest in, but also the SBA’s! See what they’re all about at http://www.sba.gov.
Our first step was to contact the commercial lender of our choice. We had already become pals with a commercial loan officer named Greg during our free business seminars through our community college. He was one of the six local professionals that volunteered to speak at the seminars to get entrepreneurs like us on the right track.
Greg was everything we could ask for. Young, married with children, and ex-military, he understood exactly who we were and the importance of what we were doing. Our business is high-end boutique baby and maternity goods in a city with an ever-growing population and no competition! Pregnant women and gift-givers had only a few choices for children’s items in our county and not a single option for the pregnant woman, herself! We had a great idea and a great plan and we knew it.
Well, that’s only half the battle. Greg set us up on the right track for the lending process. Each of us on the bank note had to be aligned – credit score of at least 660, a healthy debt-to-income ratio, and ideally, no revolving CC debt with available credit.
We learned that some debt is ok. Student loans, mortgages and car payments didn’t ruin our chances but adequately managing this debt was important. This means NEVER MISSING A PAYMENT or sending in a payment late. Each of these activities stay on credit reports for two years! At a minimum, Greg taught us to always pay our minimum payments by the due date. Ideally though, he encouraged us to add a little extra to each debt, or even double, to get the debt down faster and save big time on interest. To get us out of debt, he said to attack one card/debt at a time to knock it out fast while keeping up-to-date on all the others. One by one, they disappeared! This process took us about eight months from beginning to end.
We also learned a bank likes to see a well-balanced financial statement. We had our manageable expenses, a credit card (or even a few) with a clean record of on-time payments and eventually, zero balances, and savings accounts. He taught us to live in such a way that every card is paid off in full (and not used AND TO NEVER CLOSE THE ACCOUNT EVEN IF WE HAVE NO INTENTION OF EVER USING THE CARD AGAIN) or any charges that are applied are paid off each month. This also means zero interest and finances charges!
Once we got comfortable with this, we each picked a credit card that had reward programs we liked. Now, each month, we (and the business credit card) MAKE money rather than losing money via finance charges and interest. (But for tax purposes, we picked a business credit card that offers points, discounts on travel, etc., not cash. Cash rewards are considered income and would be taxed as such within the business.)
i also learned the Federal Government allows each individual access to their credit report free of charge, annually. We use http://www.annualcreditreport.com every four months and request free reports from each of the three main credit reporting agencies. I’ve saved the files to record which one I’ve pulled and the date so each year I can repeat for all three. These reports DON’T have the credit score number but do have all of our credit history and is a tool we still use to watch our personal and business financial health.
But a huge part of applying for the business loan is all about the actual CREDIT SCORE and to track that, we signed up with Experian so we could pull our actual average credit score numbers. We chose to do this every two months as pulling a credit score lowers it by 10 or 15 points – a dangerous act when trying to raise it!
Now that we are past the approval stage, we strategically use credit card companies that offer us our scores for free and without penalty. Discover is advertising their free Fico credit scores heavily right now, but plenty of other cards have always offered it to their customers, like Barclays and Capital One, both of which I have.
Once we were in a healthy financial state, we moved to another type of loan officer. Serena was one step closer to the underwriter, the position inside the lending office that actually approves and agrees to the terms of the loan. She was an invaluable resource. While Greg helped us attack debt and the health of the financial statement in a general capacity, Serena was someone we could get very detailed with and she helped us strategize based on our personal financial strengths and weaknesses.
While we were plugging away at all of this, we set to work to acquire a lease for a retail space. One requirement of the SBA business loan is having a lease agreement for at least the length of the life of the bank note. This means that if we took a 5-year note from the bank, our lease needed to also be at least 5 years. This requirement insures the success and safety of our new business and helps protect it from relocation woes while we’re trying to pay back a hefty loan. This is where the juggling comes in! We didn’t want to sign a lease until we had a guarantee of a loan but we couldn’t get the guarantee of a loan until we had a lease lined up! This is a delicate dance that requires a great (and patient) commercial real estate agent and the right landlord. We lucked out, again, and after about six months of searching hi and low, we found the perfect spot with a landlord that was willing to work with us. She let us issue a deposit and take a copy of a blank lease to our lawyer and to the bank. This proved (without the actual signing of the lease) that we had intent and permission to rent the space and allowed the bank to move forward in their underwriting.
If you feel like you need help prioritizing, reach out to a professional that can help you come up with a plan. CPAs and bank employees should be excited to help their customers manage their money!