Advice & Resources
Frequently Asked Questions
What is SmallBizLending.org?
Small businesses can succeed when supported with resources, mentors and capital. The SmallBizLending initiative – through this website, business community outreach and events – provides proven tools to help entrepreneurs and small business owners in Colorado prepare to seek financing and approach a bank or other lending institution. The goal is to become a central resource in Colorado to help small businesses succeed in obtaining credit so they can sell more goods and services, promote job creation and spur the economy.
What should I consider before starting a business?
You may want to start with the Colorado Small Business Development Center (SBCC) Network, which “consists of 20 community based SBDC service-centers that provide free one-on-one counseling services in the areas of business research and marketing, new business feasibility analysis, business plan preparation, finance packaging and other small business topics.”
Another great resource is Starting and Managing a Small Business from the Small Business Administration.
The Denver Public Library has excellent, free resources for entrepreneurs through its BizBoost program.
Also see the Small Business Funding Process, which displays in a flowchart much of the information you’ll find in this FAQ.
What are the best resources for creating a business plan?
A business plan clearly describes your company, analyzes the market, details products and services, explains how you intend to operate, and provides research that supports these conclusions. Financial documents include a personal financial statement, balance sheet and profit-and-loss (P&L) statement·
How can I find a local bank to work with?
Here is a listing of dozens of options for Colorado banks, each with its own application process and funding guidelines. Open a business account with the bank of your choice to begin the banking relationship and discuss the needs and prospects for your business.
What should I do or consider before I approach a lending institution?
- Develop a relationship with your lender – let your lender see your character and commitment (for instance, open and maintain a checking and banking account)
- Get your personal house in order – be in the process of addressing any personal financial issues before approaching a lender
- Be familiar with your business plan – lenders will ask a lot of questions (mission, vision, marketing, operations, management/administration and finance)
- Get out and test the water – you can’t learn how to run a business by reading books
- Don’t be afraid to share your ideas – your network will provide valuable input
- Assemble and consult with a strong team of professionals – legal, accounting and banking – early in the process
What should I do when I meet with a lender?
- Be up front and honest with lenders, your situation will literally become an open book
- Be very specific in your loan request – clearly state how the funds will be used
- Be prepared to discuss “what if” scenarios – everything from “what if my business grows more quickly than expected?” to “what if you build it and they don’t come?”.
- Make realistic projections – the words in your plan need to match the numbers you are projecting
- Project out 3 – 5 years on your business plan – this allows the lender to understand your logic
What should I do or consider once I have received funding?
- Find a mentor or business coach – many organizations provide free or low cost support services
- Recognize you are looking to become a business owner, not just a technician, and consider what that entails (administration, finance, human resources, marketing etc.)
- Network with other small business owners and leverage their advice
What should I do if I’m turned down for a loan?
Ask your banker why you were turned down and what it would take to get a “yes” so you can learn through the process and find the right lender for your business situation, which may be another bank or alternative financing.
SmallBizLending.org lists six questions to help you get the answers you need to succeed.
You may want to ask your banker about these public and nonprofit lending options:
· CDFIs and micro-lenders (see Colorado Lenders Grid)
· Guaranty programs (SBA 504 and 7A loans)
· Business loan funds (available for rural areas)
· USDA loans (available for rural areas)
· State/city/county small-business lending programs
If you are turned down again, it may be time to reassess your business plan. Seek information from the small-business support organizations (listed at right) to position your business.
How can I get more information?
According to Colorado Enterprise Fund, Colorado ranks:
- #1 in women business ownership
- #5 in business creation
- #7 in small business ownership
- #7 in microenterprise ownership
PLUS…More than $73 billion in wages are paid annually by small businesses.
AND… More than 87% of Colorado’s employees work for small businesses.
21% of all bank loans in Colorado are to small businesses, according to the Colorado Bankers Association.
The banking industry is the largest supplier of credit to farmers and ranchers – at $2.3 billion in Colorado, according to the CBA.
“Loans from banks help small businesses get established, stay in business or expand, and helped to create 65 percent of new jobs (9.8 million) between 1993 and 2009,” according to the American Bankers Association, relying on SBA data.
“Small businesses represent 99.7 percent of the nation’s 27.5 million businesses, employ half of all private sector employees (59.9 million people) and pay 44 percent of the total U.S. private payroll,” reports the ABA, relying on SBA data.
“About 15 percent of domestic banks, on net, reported increased demand for C&I [Commercial and Industrial] loans from small firms, the largest net percentage that has been reported since 2005,” according to recent Federal Reserve survey.
The Fed survey also states that the number of inquiries on new – or increased – credit lines from potential business borrowers also rose in the fourth quarter of 2011.
Glossary of Terms
A card entitling the owner to use funds from the issuing company up to a certain limit. The holder of a credit card may use it to buy a good or service. When one does this, the issuing company effectively gives the card holder a loan for the amount of the good or service, which the holder is expected to repay. Most credit cards have variable and relatively high interest rates on these loans. Credit cards also have a limit, which may be raised or lowered depending on the creditworthiness of the card holder. Most analysts recommend treating a credit card as a short-term loan, as allowing the interest to compound for too long may result in dire financial straits.
A credit line, or line of credit, is a revolving credit agreement that allows you to write checks or make cash withdrawals of amounts up to your credit limit. When you use the credit — sometimes called accessing the line — you owe interest on the amount you borrow. But when that amount has been repaid you can borrow it again.
A home equity line of credit (HELOC) is secured by your home, but other credit lines, such as an overdraft arrangement linked to your checking account, are unsecured. In general, the interest rate on a secured credit line is less than the rate on an unsecured line.
A lease is a legal agreement that provides for the use of something — typically real estate or equipment — in exchange for payment. Once a lease is signed, its terms, such as the rent, cannot be changed unless both parties agree. A lease is usually legally binding, which means you are held to its terms until it expires. If you break a lease, you could be held liable in court.
A form of lending that originated in the 1970s with small loans made to very small enterprises in Bangladesh, called micro-enterprises, with the intention of alleviating high poverty levels. Microfinance institutions (MFIs) issue micro-loans that have higher-than-normal interest rates meant to cover the high costs associated with issuing small loans. Given that the purpose of microcredit is to be a poverty relief mechanism, individuals with low credit scores who lack capital and steady employment are then able to receive loans to develop their enterprises.
A loan that is not secured by an asset or lien, but rather by the all issuer’s assets not otherwise secured. This means that an unsecured liability carries no collateral.
Factoring (Accounts Receivable Financing)
The selling of a firm’s accounts receivable to a third party, known as a factor. If a firm is not confident in its ability to collect on its credit sales, it may sell the right to receive payment to the factor at a discount. The factor then assumes the credit risk associated with the accounts receivable. This allows the firm access to working capital immediately, which is important especially if the firm might otherwise have a cash flow problem. The price of accounts receivable financing is determined by the creditworthiness of the firm’s customer, not of the firm itself.
An asset-based loan is a loan, often for a short term, secured by a company’s assets. Real estate, accounts receivable (A/R), inventory, and equipment are typical assets used to back the loan. The loan may be backed by a single category of assets or some combination of assets, for instance, a combination of A/R and equipment.
The SBIC Program is one of many financial assistance programs available through the U.S. Small Business Administration. The structure of the program is unique in that SBICs are privately owned and managed investment funds, licensed and regulated by SBA, that use their own capital plus funds borrowed with an SBA guarantee to make equity and debt investments in qualifying small businesses. The U.S. Small Business Administration does not invest directly into small business through the SBIC Program.
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral — in the event that the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to regain some or all of the amount originally lent to the borrower, for example, foreclosure of a home.
A type of debt financing whereby a company issues debt that the holders may convert into equity if the debt is not repaid in due course. This debt carries a high interest rate, as there is little or no collateral, but it is low-risk compared to other forms of debt financing because of its convertibility.
Tax Increment Financing
TIF, is a public financing method which has been used as a subsidy for redevelopment and community improvement projects in many countries including the United States for more than 50 years.
A high net worth individual who provides financing to a start-up, either in exchange for convertible debt or equity.
An investment in a start-up business that is perceived to have excellent growth prospects but does not have access to capital markets. Type of financing sought by early-stage companies seeking to grow rapidly.
Crowdfunding describes the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the internet and social media, to support efforts initiated by other people or organizations. Another aspect of crowdfunding is tied into the United States of America JOBS Act which allows for a wider pool of smaller investors with fewer restrictions.
Please note that this information is not intended to be used in place of a consultation or advice of a financial professional.
Tips & Hints
4 questions you need to answer in a business plan:
- WHO are you? (your business profile)
- HOW much do you need?
- HOW will you repay the loan?
- WHAT will happen if you can’t repay the loan?
8 tips to improve your chances of getting a loan:
- Tailor your loan to each specific lender.
- Cultivate a relationship before requesting a loan. Consider becoming a deposit customer.
- Remember Ratios! Calculate the ratios your lender tells you are important.
- Be visual. Photos, charts, graphs and color will make your proposal stand out.
- Believe in your plan. If you don’t, your lender certainly won’t.
- Enlist help — there are many resources out there to assist you with crafting your business plan (see right column). Use them!
- Be prepared, be specific, and be realistic.
- And as my mom always said, don’t forget to say thank you. Follow up with a note or call.
3 things lenders are looking for:
- Good credit score: Your credit report gives the history of how you have managed debt for the past seven years. A good credit score tells a lender that you have the ability to manage and repay a loan.
- Equity contribution: Sufficient equity contribution shows a lender that you have a commitment to the project and the ability to earn, save, and manage money.
- Repayment ability: Lenders often analyze financial statements from the past threee years to see if the business has the historic ability to pay debt service. Lender criteria vary however, so you will probably need to show that you have strong profits, good cash managment skills, and growth potential. The need to show historical evidence is why it is harder for a start-up business to obtain a loan. SOURCE: FDIC
4 financial statements to be aware of:
- Personal Financial Statement (your own personal financial situation)
- Balance Sheet (a “snapshot” of your business)
- Income Statement (“report card” for your business over a period of time)
- Cash Flow Statement (the money coming in, and the money going out)
Understand your financial statements — know them well enough to be able to discuss them intelligently with a lender.
Top 10 words of wisdom from a banker:
- Be able to provide a thoroughly researched business plan, including goals, objectives, reasonable timelines and nature of competition.
- Network with other small business owners and leverage their advice.
- Leverage business advisory services such as SCORE and local economic development centers.
- Assemble a strong team of professionals — legal, accounting and banking — and consult early on in the process.
- Be prepared to discuss “what if” scenarios — everything from “what if business grows more quickly than expected?” to “what if you build and they don’t come?”
- Debt vs. Equity — banks tend to avoid having more skin in the game than the business owner.
- Leverage microfinance resources.
- Focus on expense assumptions as much as revenue assumptions. For example, if your company wins a contract can it be completed in a profitable manner?
- In start-up/small business financing, bankers typically review global cash flow analysis. Excessive personal debt can hinder an application, whereas outside recurring income can help an application.
- It is standard practice for government guaranteed loan programs to require a background check on borrowers.
ACCION aids in bridging biz loan gap, Denver Business Journal, 6/15/12
Colorado Bankers Association has launched a new website, Grand Junction Free Press, 3/30/12
Colorado bankers answer call for small-business access to capital, The Schwab Blog, 3/29/12
Banks join in effort to help small firms obtain financing, The Business Times (Grand Junction) 3/28/12
Bankers launch effort to reverse image, Colorado Springs Business Journal, 3/23/12
Colorado Bankers Making Small-Business Push, American Banker, 3/13/12
CBA has launched a new website SmallBizLending.org (2nd story down), Northern Colorado Business Report, 3/9/12
Website offers loan assistance, Associated Press, 3/2/12
New website aims to help local entrepreneurs, KWGN2, 3/1/12
Lenders unveil website to help small businesses find loans, Colorado Springs Gazette, 2/29/12
SmallBizLending.org launches, 850 KOA News Radio, 2/29/12
“Let’s Talk small Business,” 850 KOA News Radio, 2/29/12
Colorado banks to help small business owners, 9News, 2/29/12
New website aims to help local entrepreneurs, Fox31, 2/29/12
New website offers financial guidance to small businesses, The Denver Post, 2/29/12
Colorado bankers, lenders launch website for small-business financing, Denver Business Journal, 2/29/12
Groups Come Together To Help With Small Business Loans, CBS4, 2/28/12
Colorado bankers set to help small biz access capital, Colorado Springs Business Journal, 2/24/12