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When It Comes to Getting Financing, It Pays to Think Big

June 10, 1998

Surprisingly, getting a big loan is often easier than getting a small loan. That's because:

* Financial institutions are more familiar with processing larger loans.

* The larger the loan, the more financial information is generally available about the business requesting money.

* Larger loans are usually more profitable for lenders because more interest is earned on a larger loan amount.

* Processing one large loan involves less labor for lenders than processing a dozen smaller ones.

Today, amounts of $250,000 and higher are considered large. These loans have interest rates of 1% or 2% over prime rate, the most favorable short-term loan rate charged to corporations.

For most banks, profit is the major lending consideration, and they evaluate loans accordingly. But agencies such as the Small Business Administration, which seek national economic growth, and economic development corporations, which promote creation of local businesses, may base their lending decisions in part on those goals.

Among the more common big-loan lenders:

Banks: Bank money is typically the cheapest money around at 1% or 2% above prime rate, with fees and points. For that reason, it's hard to get.

Banks lend with other people's savings and checking account money, so they take few risks and earn small returns. They base their lending decisions on past company performance, so loan applicants typically need at least three years of positive financial records.

Your loan package should include your company's financial history, documents showing the loan can be repaid from company earnings and a list of savings accounts, equity sources or other collateral that can be sold to repay the loan in case your business tanks. The loan package also should include information on economic and industry trends that will benefit the business, your qualifications to run the business and your history of repaying debt or performing as agreed.

The five Cs that banks look at when evaluating loan candidates: capacity to pay back (from company earnings), capital (savings), collateral (equipment or buildings), conditions (in your industry) and character (your past loan payback record).

Further, banks often consider your relationship with them, whether you hold a checking account, savings account or credit card.

Thrifts, finance companies and other non-bank lenders: These lenders don't follow banking regulations. Most are governed by various state departments and agencies, process loans in different ways and can often take more risk than banks, especially those that invest their own money rather than that of account holders.

But with greater risk-taking, these lenders charge higher interest rates, fees or other conditions: generally three- to five-year loans at interest rates 3% or 4% above prime, with fees starting at 2% of the loan.

Since the money loaned is frequently used to buy equipment or for working capital, small-business owners must provide these lenders with the same documents required by banks, as well as invoices or purchase orders to verify that the money was used for a business purpose.

Another difference is that banks typically require collateral--equipment or buildings--as a third-position repayment backup behind company earnings and capital. But thrifts, finance companies and other non-bank lenders put more weight on collateral. For that reason, they are dubbed "collateral" or "asset-based" lenders. They include:

* Savings and loan associations that follow federal regulations.

* Finance companies, such as Household Finance and GE Capital.

* Non-bank lenders such as the Money Store, accounting firms such as Merrill Lynch, insurance companies and credit unions.

Alternative loan programs: These lenders, typically partnerships between public and private capital sources, are probably the best-kept secret. They usually provide loans targeting specific populations or neighborhoods and, along with financial return, look for a social return, such as economic development for low-income neighborhoods or job creation. Loans range from $5,000 to $500,000. Interest rates are similar to those charged by banks and finance companies.

Small businesses must meet program goals and restrictions, plus provide a loan package, financial statements, company history and outlook and details on the firm's management team. Examples of these programs are:

* California Capital Access Program, or CalCAP, a state-subsidized lending program for established non-retail firms whose operations affect the environment, such as manufacturers, agribusiness and contractors.

* Recycling Market Development Zone, a low-interest loan program by the California Integrated Waste Management Board for small businesses using new technology or creating new products from recycled waste.

* Export-Import Bank, a short-term, loan-guarantee program of the U.S. Export-Import Bank for small and medium-sized exporters.

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