YNCU - FAQ For Business Loans
FAQ for Business Loans:
1. What are the different ways to finance my business?
2. Is borrowing the best way to finance my business?
3. How much should I borrow?
4. What is the longest term you can offer on a loan?
5. What do lenders look for when assessing a loan application?
6. What types of collateral would you accept?
7. My credit history is not so good. Can I still apply for a loan?
8. What is a good business plan?
9. What type of financial projections do I need to prepare?
10. What are SBA loans? Do you process SBA loans?
11. What are the eligible uses of the loan proceeds?
12. Do I have to become a member of one of your credit unions before I apply for a loan?
13. What type of businesses do we lent to?
1. What are the different ways to finance my business?
There are three basic ways to finance your business:
a. Equity investment - Funds coming from either your personal resources or raised from other investors, called venture capitalists or angel investors, who require repayment at a future time through the sale of the business or of common stock.
b. Debt - short-term or long-term loans carrying a certain interest rate and repaid typically over a predetermined period of time.
c. Internally generated funds - Net profits earned by the business that are accumulated as net worth and reinvested into the business. These retained earnings do not apply to startup businesses.
2. Is borrowing the best way to finance my business?
As a general rule, lenders would like to see that you have a personal financial commitment in your business in the form of equity. This can range from 25% to 50%. Also, if you have an existing business, profits generated from past operations are available to support the expansion of its operations. Traditionally, a loan is an option only if these two sources of funds are insufficient, but financial experts suggest that a combination of all these three sources is most ideal.
3. How much should I borrow?
You should prepare a detailed Sources and Uses Budget for your start-up business or expansion project. Create a list of the actual cash you have on hand that is available to be invested in your project, as well as other expected sources of funding. Then outline in sufficient detail how these funds will be used.
The uses of funds would include (1) Hard costs, such as leasehold improvements, the acquisition of machinery, equipment, and furniture and fixtures, etc. and (2) Soft costs, which may consist of payments to architects and other service providers, the costs of securing licenses, permits, and similar expenses.
Based on your financial projections, which take into consideration your realistic expectation of income and expenses, you may also require working capital until the business is capable of sustaining itself through its operations. Add these all up to get your total project cost.
Compare the total uses of funds (or the project cost) to the funds you have on hand or firmly expect to receive. The balance will either have to be borrowed or raised from investors.
4. What is the longest term you can offer on a loan?
The maximum term that the credit unions, our lending partners, can extend is 12 years, however, 4-5 years is more typical. While there is some flexibility in the term, a substantially longer term is rare.
5. What do lenders look for when assessing a loan application?
Loan applications are evaluated based on the five C's of credit analysis:
Character – The character and commitment of the principals or borrowers.
Your educational background and experience in business and in your industry will be taken into consideration.
Capacity - Includes both debt repayment ability (as evidenced by historical financials or cash flow projections) and the managerial capabilities of the owners and management team.
Collateral – The availability of sufficient business or personal assets to secure or back up the loan in the event that the loan cannot be repaid from the operations of the business.
Capital - The equity contribution, or personal financial investment, of the owners. This should be at least 25% of the total project cost for start-ups.
Credit - This considers the past history of the owners in repaying other debts, which is used as a gauge to assess their likelihood of repaying a new loan.
6. What types of collateral would you accept?
Cash or other financial instruments, real property, machinery and equipment, or other business assets, including but not limited to inventory and receivables. A personal guarantee is required from every individual owning 20% or more of the business. On a case-by-case basis, a co-signer or third-party guarantor may be required.
7. My credit history is not so good. Can I still apply for a loan?
We do not immediately dismiss anyone with a less-than-perfect credit record. We will explore other options with you and try to understand the factors behind the low credit score. You may pursue your loan application with us as long as you have no past due government obligations, liens, judgments, or charge offs.
8.What is a good business plan?
A good business plan should be thorough, sound, feasible and realistic. It should assume that the reader is not an expert in the type of business you are seeking to start. The discussion should be detailed so that we can understand exactly how you plan to start and operate your business. It is important to clearly state the assumptions that underlie the business plan and the financial projections and to justify them, if necessary.
There are many free resources available that can assist you in writing a business plan and in preparing financial projections. However, you should not rely entirely on a consultant for this preparation, since we expect the business owner to understand every facet of their business.
9.What type of financial projections do I need to prepare?
We require financial projections for a three-year period, broken down monthly. The income and expense statement should incorporate a cash flow analysis that indicates the business' cash position at the end of each month. You should also submit a projected balance sheet as of the end of the first year. Remember to clearly state your assumptions in a separate section and be prepared to justify those assumptions. Overall, it should be sound and realistic. (See small business resources for assistance on financial projections)
10. What are SBA loans? Do you process SBA loans?
SBA loans are guaranteed by the US Small Business Administration but are funded, processed and underwritten by financial institutions that are certified by the SBA to make those loans. The guarantee reduces the lenders risk in making the loan and allows the lender to make the loan at a lower interest rate. Our credit unions are certified to make SBA Express loans to qualified borrowers. SBA eligibility is determined by the Small Business Administration after your loan application has been processed by the credit union.
11. What are the eligible uses of the loan proceeds?
Loans should be strictly used to grow your existing business or start a new venture. The proceeds can be used to finance leasehold improvements, the acquisition of equipment, furniture and fixtures, and for working capital. We DO NOT fund any form of losses, past due obligations, tax liens, initial product development phases, or research and development. We expect that the loan will be invested into the business immediately to satisfy your existing business needs or to begin operating.
12. Do I have to become a member of one of your credit unions before I apply for a loan?
Upon applying for a loan, the loan applicant is encouraged but not required to become a member of one of our credit unions. However, membership in the credit union must occur before the loan is closed.
13. What types of businesses do we lend to?
The following are some examples of the types of businesses to which we have lent in the past:
- Retail stores : jewelry, clothing, handbags and accessories, wine, and more
- Small grocery stores or bodegas
- Professional services
- Restaurants and coffee shops
- Film production firms
- Fashion design and apparel, etc