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A Guide to Business Credit for Women, Minorities, and Small Businesses |
The need for financing is a critical and perennial concern for the owners of small businesses. Indeed, few things are as crucial to the health of a small business operation. Many small businesses are launched by the personal resources of their owners. But they can quickly reach the stage where the owner must look to the credit market for financial help in expanding operations. The banking industry is an important source of working capital. However, entrepreneurs may not realize that applying for commercial credit is a more customized process than obtaining consumer credit, and requires a great deal of preparation by the business applicant. This brochure may help to de-mystify the process and improve your chances of getting the credit you need. Types of Loans 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 pan 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. The Credit Application Process 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! 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:
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.
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 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. Sources of Technical Assistance 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. If Your Application Is Not Approved 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. 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 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. Equal Credit Opportunity Act 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 restitution, 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. 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 Need Help 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. Federal Enforcement Agencies All creditors are subject to the Equal Credit Opportunity Act (ECOA) and Regulation B (issued by the Federal Reserve Board), which contains specific rules governing credit transactions. The following is a list of the federal agencies that enforce the ECOA and Regulation B for particular classes of financial institutions. Any questions concerning a particular financial institution should be directed to its enforcement agency. State Member Banks of the Federal Reserve System Non-Member Federally Insured Banks National Banks Federal Savings Association Small Business Investment Companies Federal Credit Unions Finance Companies and Other Creditors Not Listed Above The U.S. Small Business Administration (SBA), the federal agency created specifically to assist and counsel small businesses, suggests the following sources of capital in addition to banks:
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