m5 l3 loans and credit

M5 L3

Loans and Credit

For Small Business

Process for Getting a Loan

1. Select the bank carefully.

2. Prepare financial statements and a business plan.

3. Make an appointment.

4. Prepare to answer questions about your business plan and/or financial statements.

M5 L3

Types of Loans Available

•Secured Loans

•Unsecured Loans

Secured Loans

A loan that is guaranteed by collateral that has a value worth the amount of the loan. Should the borrower not pay the loan, the item given as collateral will be taken as payment.

Secured Loans Available

Short-Term LoanMust be paid back within a year; may be used for the specific purpose of dealing with a cash flow problem. Prepare financial statements and a business plan.

Secured Loans Available

Long-Term LoanRepayable over a period longer than one year; may be used to make improvements that will help increase profits.

Secured Loans Available

1. Agreements made by a bank to lend money at a stated interest rate whenever the owner needs it. 

2. A fee is charged for the privilege whether the money is used or not, and interest is charged on any money that is used.

Line of Credit

M5 L3

Entrepreneurial Characteristics Needed to Obtain Financing

(6 C’s of Credit)

Character

Capacity

Capital

Collateral

Conditions

Coverage

1. Character The bank needs to believe in the character of the entrepreneur and the people with whom he or she is associated, including the management team of the business.

• Responsibility shown by paying bills in the past

• Good credit rating

• Good reputation

2. Capacity

• Evidence of the ability to repay the debt

• Legally eligible to enter into contracts

3. Capital The bank needs to believe in the character of the entrepreneur and the people with whom he or she is associated, including the management team of the business.

• Demonstrated ability and willingness to invest personally in the business venture

• Evidence of a good financial plan with little outstanding personal debt

4. Collateral Something of value that the lender can claim if the debt is not repaid.

A car can be use as collateral

A person with a good credit rating can co-

sign with you.

A home if you own it.

5. Conditions The bank will consider all of the environmental conditions such as competition, growth, location, and economic outlook in which the business will operate.

6. Coverage The bank will want to know what kind of insurance coverage the entrepreneur has.

M5 L3

Factors to Consider When Choosing a Financial Plan

Risk

Control

Availability

1. Risk

• There is a greater risk of loss with debt funds since the entrepreneur must repay the loan in accordance with the terms or risk losing the business, collateral, or even personal possessions.

• There is less risk for the entrepreneur with equity funding since no repayment is required.

Factors to Consider When Choosing a Financial Plan

2. Control

• Entrepreneurs often lose control of decision-making power with the use of equity funds.

• Debt funds do not involve this loss of control.

Factors to Consider When Choosing a Financial Plan

3. Availability of Funding

• The entrepreneur's credit history or earning potential can help or might eliminate him or her from securing a debt loan.

• Equity sources might not be readily available.

Factors to Consider When Choosing a Financial Plan