Business Loans: Broken Down

Banking knowledge is fun to bankers. This, of course, makes sense, as it is their chosen profession. However, there are those few of us in the world who detest complex words, numbers, and business-related jargon. If you are opening a small business, you don’t have to be a business major, but you should have a small bit of knowledge to get you through life. Specifically, if you own a business, or aspire to own a business, you need a “two-inch layer” of information in order to obtain a loan. You don’t have to be an expert, but you should know enough to have an understanding of how your money and business work within the asset-based financing world.

You may think, ”Why would I need a loan?”

This, of course, leads to identifying the population of people who don’t have thousands of dollars at their disposal — almost everyone. Because of this, loans are important to begin your business and give it a boost off the ground.
Probably the most important question you should be asking yourself is how to get a loan. That is where we can help!
The Commercial Financial Group (CFG) was founded in 1974, and has provided banking solutions to clients all over the United States. We have almost 250 years of combined experience in asset-based lending, and are more than prepared to handle your business loans. As a business ourselves, we understand the necessary features to make a business successful. With us in your corner, you will be able to make informed decisions about your money and your business.

How to Get a Small Business Loan?

In this blog series, we are going to have a complete break down of asset-based loans, asset-based lending, and loans for small businesses. Before we begin in how to achieve these types of loans, we want to make sure you have a full understanding of these terms.

What is Asset-Based Lending?

*Asset-based lending is when a business loan is secured by collateral or a personal asset.

Example: Say, you own a bakery, but your bakery is going through a rough patch. You could receive a loan from a firm, as long as you have an asset to put up as collateral. An asset can be anything that makes the loan-to-value ratio even.

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What is an Asset-Based Loan?

*Asset-based loans are secured by your assets as collateral.

Example: As lending is a verb in this scenario, the asset-based loan is the noun. The loan itself is the money you receive for your business, only after you have put up collateral. Your assets in the bakery scenario could be anything from equipment or any thing of monetary value.

Lenders require the ratios to be balances and assets set up as collateral as a way to protect their interests. Hypothetically, if you receive a loan and then were not able to pay off the loan, the lender would be out their money they gave to you. Since the financial crisis of 2007/2008, many financial groups have had to change the way they lend to clients, as almost 465 failed due to bankruptcy. Because of the traumatic experiences in the financial world in 2008, liquid assets put up as collateral are essentially their great protection from another financial crisis.

What is a Liquid Asset?

*A liquid asset, or “liquid securities” are any type of asset that can easily be converted to money.

Example: If you put up equipment as an asset, it cannot be easily transferable to cash. Why? Because, it will need to be evaluated and then sold for profit. Liquid assets are things like currencies, commodities, and equity traded in electronic exchanges (New York Stock Exchange).

Today, you will not be able to secure a loan without collateral. That being said, if you cannot pay off the loan that you set up with a lender, you must understand that any financial group has a right to the asset you put up to receive the loan. It is nothing to be afraid of, however. Loans happen everyday, and are paid off everyday. Plus, a loan could mean the difference between shutting down your business or remaining open. The key part to remind yourself is that loans are to be taken seriously, but are not supposed to inspire fear. Whether you are trying to open a business or support a current business, you will need a loan. Because of this, you want to hire a lender that is as serious about your business as you are, and will maintain a good relationship with you.

Getting a Small Business Loan

Now that you have some definitions and examples under your belt, let’s get to work! Getting a loan can be broken into three pieces:

  • Self-Preparation
  • Lender-Preparation
  • Loan-Preparation

Self-Preparation

Self-preparation is when you prepare yourself and your business for the initial meeting with a lender. Think of this stage as the “interview stage” of the process. You want to make sure your business is well-organized and is presentable. In many ways, you almost want to ask yourself interview inspired questions, such as, “Why should you give me this loan?”
This stage is when you hone the answer to that question, get your finances in order, and groom yourself as if you were going to a job interview. Meeting with a lender isn’t going to be like the television show, Shark Tank. The stakes aren’t as high and the loans aren’t as instant. However, in many ways both processes share similarities. The whole point of meeting with your lender is to prove that you have a lucrative business and product that will be able to pay back the loan they may (or may not) give you — much like the television show.
Be sure when in this self-preparatory stage you determine how much money you will need to launch your business, and how quickly you can pay the firm back once your business initially launches.

Lender-Preparation

For preparing your lender, ultimately, you want to know and understand all your information. This means you will need to know your credit score, know your business plan, present your plan, and have two distinct plans in which to pay back the lender once they give you a loan. Better still, if you have illiquid assets (assets that are not directly money) you will have them appraised and well-documented. Organization is key when applying for a loan. Knowing what you are getting into is important and will reassure the lender of your intentions.
With asset-based financing, your lender is putting their trust in you to repay back the sum you are loaned. If you default, that means that you are not able to make consistent payments to decrease your debt to the lender. With asset-based loans, if you default, your collateral is forfeited as a source of payment.

Loan-Preparation

For loan preparations all you need is a printer and a pen. For this phase of the process, you need to be able to fill out all the necessary paperwork. This includes but is not limited to:

  • Articles of Incorporation
  • Commercial Lease
  • Franchise Agreement

You will also have to collect informational documents, such as business and personal tax returns, business and personal bank statements, and business financial statements. With this collection of paperwork, you will be able to build a case for yourself. With raw numbers, tangible documents, and a passion for your business, lenders will be compelled to give you a loan.
If you are found lacking in any of the process, it is possible to be denied from your loan. However, the key to the loan process is learning from your mistakes and finding better ways to reach success. For example, if you are denied, it is important that you ask (calmly) what was not desirable about your application. Your lender will tell you what halted your loan, and once you know what caused the denial, you will be able to fix your application and try again!

The Commercial Financial Group

At CFG, we are happy to help you with your financial needs. If you are opening a business, or would like to keep a business running, contact one of our representatives. We would love to hear about your business, and how we can help you. Contact us!