• The specific purpose of the funds (e.g., equipment, working capital, remodel, expansion, acquisition) and how that purpose fits into the business plan. • How urgent the need is and how long the funds will be required. • The level of risk—industry risk, competitive risk, and business-stage risk—and how that may affect cost and terms. • The stage of the business (startup, early growth, expansion, turnaround) and how that influences financing options. • Seasonality or cyclicality of revenues and whether needs are short-term (to bridge seasonal dips) or longer-term. • The strength and experience of the management team, which lenders heavily weigh. • How the financing request aligns with the written business plan. If there is no plan, creating one should be the first step, because nearly all lenders will ask for it. Small Business Development Centers (SBDC) counselors can help review business plans, test financial projections, and identify appropriate financing sources. They can also assist in preparing a loan package, which typically includes a business plan, financial statements, tax returns, personal financial statements, detailed use-of-funds schedules, and projections. Speaking with several lenders early can help calibrate expectations and understand each institution’s lending criteria. Loan terms, documentation, and covenants Most business loans and credit facilities are governed by detailed legal documents. These set out: • The basic economics of the loan (amount, interest rate, fees, repayment schedule). • Representations and warranties (factual statements the borrower makes about the business). • Covenants (ongoing promises about how the borrower will operate and what financial ratios or conditions will be maintained). • Security interests, personal guarantees, and other collateral arrangements. Covenants are important both for lender risk management and for demonstrating to regulators that loans comply with applicable banking rules. Failure to comply with covenants can trigger default, allow the lender to accelerate repayment, or lead to other remedies. The Minnesota Small Business Assistance Office produces a free guide, “Loan Documentation: An Introduction for Small Businesses,” which explains common loan documents, terms, security interests, guarantees, and what can happen if a borrower defaults. Past Credit Problems A borrower’s personal credit history remains a critical factor in small business lending decisions. Late payments, charge-offs, judgments, tax liens, or prior bankruptcies can significantly reduce credit options or increase interest rates. While adverse items may fade from a credit report over time, serious derogatory marks can make it difficult to secure conventional financing until they are resolved or removed.
104
Made with FlippingBook - Online Brochure Maker