You must be prepared to demonstrate collateral, character, credit rating and capital before you approach a bank for a loan. The bank won’t tell you that they will use these five points to make a decision on whether or not they want to give you a loan. But you have to know what they are or they will simply decline your application.
First the bank will look for collateral. What assets are you going to put up to cover the loan? Collateral is something that the bank can sell for cash to repay itself in case your business fails.
When Brian Tracy first applied for a loan, and his business was fairly successful, the bank wanted 500% collateral coverage from him. For every dollar he was asking to lend for a line of credit, they wanted to prove that he could sign over to them $5 that they could cease and sell in a bonus sale, a rush sale, in order to cover their money. Without $5 of coverage they wouldn’t lend him any money at all, he says that he still is shocked about the experience.
The second thing banks look for is character.
- What is your previous history regard to loans?
- What kind of character do you have in terms of honesty and dependability?
- Who knows you?
- Who will vouch for you?
Brian Tracy traveled to Hawaii for four weeks. Just after he had left for Hawaii, the MasterCard bill had arrived and sat there for a month until he got back to pay the bill. This MasterCard deviation was put on his permanent credit record. And when he went to apply to a mortgage for his house, this bill, which was only for a few dollars showed up as a black mark on the x-ray and they declined his mortgage application as a bad credit risk. That’s why it’s so important to keep your credit impeccable. Only bad credit experience can put a black mark your credit rating and undermine your quality of your character in the eyes of your banker.
The third thing that banks look for is your current credit rating. How much money have you borrowed and repaid in the past. How good is your credit history today? Your credit rating is an extremely important thing that follows you were ever you go. People with a good credit rating can often borrow all the money they want.
Never forget what Benjamin Franklin once said:
“Cash is money and credit is money”
The fourth thing banks look for is the amount of capital you have. How much of your money are you willing to invest. This is to find out how deeply committed you are to the success of the business.
Have you ever heard the phrase “never invest your own money in your new business instead always insist that the bank provides you with the money”? This person has never borrowed money from a bank to start a business, and he’s giving advice to young entrepreneurs, advice that is 180 degrees off of what the truth is. The bank will want to know that you have put your whole heart in every penny you own into the business before they will lend you their money.
Level of Confidence
In the final analysis the individual bank must have confidence that you are the kind of person who’s going to succeed in the business that you are going to build.
After a bank has several years of experience with you and comes to know you and trust you its lending requirements will decline step by step.