| The sky is falling! Run for your life! The banks aren't | | | | Isn't that what we were just talking about? No. Hard |
| lending! Well, the first two might be correct, but the last | | | | capital refers to assets owned by the business. |
| one is not. Commercial banks are lending, but they are | | | | Collateral refers to assets the business owner's own |
| very picky. | | | | personally such as their homes and interests in other |
| Private lending practices are known for being very | | | | businesses. By any name, this is a personal guarantee. |
| forgiving and very sloppy. One needs look no further | | | | It is a way for the bank to both shift risk to the |
| than the current financial mess to realize as much. | | | | business owners and verify the owners are serious |
| Banks were handing out money to pretty much | | | | about making things work. It should be noted that a |
| anyone who asked for earlier this decade. The result? | | | | personal guarantee trumps the protection provided by |
| An overheated housing market that finally collapsed | | | | a corporate or LLC shell. Put another way, you lose |
| and is even now taking down banks right and left with | | | | the protection of those entities if you personally |
| it. | | | | guarantee a loan. |
| Commercial banking is a part of the financial industry | | | | Our next factor is revenue history. Also called |
| that bears little resemblance to personal finance. In | | | | capacity, this refers to the ability of the business to |
| fact, about the only common factor is both have the | | | | make the loan payments based on the revenues it is |
| word "banking" in them. Other than that, the process of | | | | generating. If the business asks for a loan that will |
| successfully applying for a loan is very different. | | | | require $10,000 in monthly payments, but only brings in |
| Regardless of the type of commercial loan you are | | | | revenues of $9,000 a month, it does not have |
| seeking, there are always four basic components you | | | | sufficient revenues to service the loan. This rather |
| need to be strong on. | | | | obvious example would result in a rejection of the loan |
| Hard capital is the first element of the four. It refers to | | | | application by a bank. |
| the hard assets owned by the business. This can | | | | To the surprise of many business owners, the last |
| include things such as real estate, machinery and the | | | | element considered is their personal credit history. The |
| like. If the business has significant assets, a bank is | | | | bank wants to know if you've cut and run on loans like |
| more likely to give you a loan secured by those | | | | this before. It will give your credit history the once over |
| assets. If you then default on the loan, the bank can | | | | and will also gauge if you are a good risk by looking at |
| sell off the assets to recover some of the funds. | | | | your FICO score. |
| Banks generally don't like doing this, so just having a | | | | Can you get a business loan in the current financial |
| significant amount of capital will not be enough to get | | | | markets? Yes, of course. You just have to make sure |
| you a loan. | | | | you are strong on the four elements above. |
| Our second element is the collateral for the loan. Huh? | | | | |