Using Bank Financing in your Home Business
By Nora Caley

If you need to borrow money to grow your business, there are certain advantages to bank loans. While your friends and family who loan you money or invest in your business might want to also give you advice or put certain conditions on the deal, a bank just wants to be repaid with interest.

The disadvantage is that it takes time and paperwork to apply for a loan, but the effort might be worth it if it means you are able to purchase the equipment you need or buy the vehicle or other items for your home based business.

According to the Washington DC-based National Small Business Association’s 2008 Survey of Small and Mid-Sized Business, more than half (54 percent) of companies had some type of business loan. Twenty-nine percent had a bank loan in 2008, compared to 28 percent in 2007. Only 5 percent in 2008 had bank loans that were backed by the U.S. Small Business Administration (SBA), compared to 6 percent in 2007.

When you shop for a bank loan, look for loans that have the lowest interest rates, the longest payback period, and the least risk for your personal assets.

Interest Rates
The interest rate will vary according to the type of loan and the bank’s rules. SBA-backed loans have certain limits. For example, fixed rate loans of $50,000 or more cannot have an interest rate higher than prime plus 2.25 percent for a loan of seven years or less, and prime plus 3.75 percent if the maturity is more than seven years. Smaller loans have higher interest rates. (The prime rate in August was 5 percent.)

For non-SBA loans, the rates vary. According to the Federal Reserve Board, the rate charged by banks for short term loans averaged 7.96 percent in 2007, and 8.05 in 2008 (as of August). Your personal credit can affect your business loan terms.

If you have a new business that has no history of sales, you might opt for a personal loan. You can apply for a secured loan, which can use your existing savings account or other property as collateral. You can also apply for an unsecured loan, which has a higher interest rate.

Some banks offer a slight discount if you sign up for a small business package. You would get their merchant services to enable you to accept credit cards, open a checking account that will have a certain number of transactions each month, and use a business credit card from that bank. The lender might not offer you a lower interest rate, but it can waive the application fee, which could be $100 or more.

If you get a home equity loan, in which your house is the collateral, the interest rates vary from about 5 percent to almost 8 percent, according to BankRate.com.

Collateral
When you apply for a business loan or line of credit, the bank will want you to repay the money with the proceeds from sales of your product or service. Collateral is a sort of Plan B, the asset pledged for the loan. If your business does not have enough cash flow to repay the loan, the ownership of the collateral can be transferred to the bank, which means the bank can take the item and sell it and keep the money.

Collateral can be the equipment you use to manufacture your items, the inventory of products you are selling, or in the case of an auto loan, your vehicle. With a business, if you use your inventory as the collateral, the bank will use a percentage of the value. If you have items that you would sell for $100 retail, the bank will only count that as $50 or $75, to lower its risk.

Other Details
Try your local bank, where you already have accounts. Also try one of the small banks in your area. According to the Washington, DC-based group Independent Community Banks of America, the members of community banks’ boards of directors are local citizens who want to advance the interests of the towns and cities where they live. Also according to ICBA, community banks provide 35 percent of the total dollar amount of small business loans under $1 million.

Before you apply, do some research on the web to see what types of questions the lender will ask you. Have your documentation, such as tax returns and bank statements, ready. And don’t worry about the credit crunch. Also according to the NSBA Survey, 70 percent of small business owners were confident about their business’s future. HBM

Nora Caley is a freelance writer based in Denver. She specializes in business articles.

Previously published in the December 2008 issue of HOME BUSINESS® Magazine, an international publication for the growing and dynamic home-based market. Available on newsstands, in bookstores and chain stores, and via subscriptions ($15.00 for 1 year, six issues). Visit www.homebusinessmag.com