The million dollars is just an arbitrary number but what kind of variables help to land a large business loan?

My guess:

-Solid business plan
-Proven record of success
-Savings (200-300k)
-History dealing with bank/good banking contact

That's just me guessing though.

Can someone who has experience in this please give some detailed insight.

What kind of savings would one generally need?

What kind of payments would one have to expect to pay back -time/amount?

What do bankers specifically look for, how willing are they to take risk?

If I am hypothetically saving 100K a year at the moment does that mean, with the right business idea and plan, that I could secure a $1M bank loan in the near future if I so wished?

Thanks

Business friends have been telling me that bank loans have become more difficult to get. Apparently some (if not all) banks are requiring business owners to personally underwrite business loans incase the company fails.

Is this to fund a new business, or a line of credit for an operational business?

If the former, then forget about banks -- it's too much risk for them. Instead, you need to go the private equity route if you need to raise money.

If the latter, then they'll often want to see audited financial statements, business plan, etc. Also it helps if you've been a long-time banking client of theirs.

When you say bank loan I assume you mean a bank loan from an FDIC bank.

There is some variability in bank standards meaning how liberal they will be with rates and borrowing capacity. Some more conservative than others.

Any of these traditional banks are going to provide asset based lending. In a simple example, that is what they do on a mortgage: you put down some amount, say 100K and purchase a $1M property (which is the asset).

In the case of a bank loaning on a business, they are going to be conservative and loan on assets. If this is an existing company, they will look at financials, cash flow and lend based on cash, average account size, AR, Inventory. These are assets which they will use different formulas. They may (and do on smaller enterprises) ask for personal guarantees which is another way to leverage more assets: your personal ones.

Not totally clear from your post, but if this is a new business venture and you are trying to leverage 100 to 300K into a $1M bank loan, that is going to be essentially impossible. You can buy some real property and leverage up. if you are opening a business with no history of cash flow and profit, I'd say you will not get 3X to 10X leverage from any traditional bank on the numbers you're talking about.

Keep in mind the bank is quite conservative and does not want to extend themselves much past asset lending, but you can leverage up a notch with cash flow from an existing concern. You also pay the lowest relative interest on bank debt, as in 3.5 to 5%.

There are other forms of finance: equity or dent equity hybrids which will be much more expensive.

Okay so lets say as an example...

I wanted to start a ski resort:

The land costs -200K
Work to make the land suitable to ski -200k
Equipment -100k
Buildings -100K
Cash flow for the first year-300k

Savings 300k.



Would the bank see the construction of the slope plus the building as an asset?

Is this something you approach a bank about or do you look for private investment?

If so how does one go about that?

This is a purely fictional example, I'm not starting a ski resort haha.


Plus if anyone can recommend a suitable book for this topic I'm all ears.

This is basic accounting...
The construction of the slope is a one time cost, and it's non-recoverable. If anything it's a liability.
And since it isn't exactly an asset based loan, you may have to search either a PE firm that would buy the business, or a venture capital firm that would be willing to make the investment in your business.

It's not what you need.

It's who do you know.

Quote: (01-27-2014 04:02 AM)Maciano Wrote:  

It's not what you need.

It's who do you know.

For bank loans?

Are you sure about that. Expand, please.

Quote: (01-27-2014 04:13 AM)Beyond Borders Wrote:  

Quote: (01-27-2014 04:02 AM)Maciano Wrote:  

It's not what you need.

It's who do you know.

For bank loans?

Are you sure about that. Expand, please.

OK, my comment was a little too brief, but what I meant was that bankers often are just like regular people and are more lenient towards lending if they know you, if they like you and if they think they can trust you than if you're a stranger. It sure helps if you know certain people from university or sororities. Bankers are very careful these days. They don't give loans to anybody because they fear the investment will be lost and they'll suffer the consequences. However, if they think the investment is safe with you, they will be MORE likely to give you a loan.

It's like writing a job letter for a vacancy. You'll be competing with 100s if not 1000s of potential candidates. However, if you knew somebody in your network who could squeeze you in, you'd have a much better chance of landing the job, regardless of skills that set you apart from 1000s of others.

Shotgun

Balaclava.

You need collateral man. If you default; the bank wants their money and how the hell would you pay them? If you have roughly a million dollars in assets (your house, stocks, bonds, investment properties, business assets) you can risk it all and maybe get the loan but if your business fails you lose everything you own.

If you have a solid proven business plan which I suspect you don't; you could look to venture capitalists or angel funding. Or try to start smaller. If you just have 200k in cash, you're not gonna find anyone crazy enough yo give you a million dollars.

Quote: (01-27-2014 06:55 AM)chibluu Wrote:  

If you have a solid proven business plan which I suspect you don't;

Again: This is a fictional example

I am interested in knowing how you can leverage relatively small amounts of savings into a larger business loan, how these loans are typically paid back and what the best routes are for seeking investment.

Thanks for the vote of confidence though.

depending on your model and sales skills... first you get customers.

Getting customers before you can deliver product is real hard, but some people can do this.

Andrew Forrest, chairman of Fortrescue metals in Australia, did this. he promised a whole bunch of chinese steel mills he would devilver 1 million tons of iron ore by 2011/12.

He failed in his previous venture and had a bad rep. He had a couple of $mil of his own, found friends who lent him a $mil or two, then got various lenders. he also had the development rights to a big chunk of prime iron ore land in the pilbara.

His thing was to build an train line, as this would ship the volumes cheaply and enhance operating margin. It helped that the China boom meant he was able to raise capital at what was once over $11 per share... now $5.23, but this fluctuates base don the onboard price.

Fortescue's operations are now the 4th cheapest in the world, behind Rio, BHP and Vale.

However my premise still stands. He had guaranteed customers, and Iron ore has been $80-$130 per ton for a long time.

Guaranteed customers, guaranteed volumes, he owns about a billion shares, a bit less than 1/3 of the company.

He leveraged his own money over 1,000 times... yet he wouldn't have need any once he got his customers.

Guaranteed customers is the key.

Sorry Irishman; didn't mean to be condescending, but I just think you might be getting ahead of yourself a bit. I would scale back your expectations a bit and start smaller. There's joke that goes something like the only way to get a loan with a decent rate is to not need the money.

If you have $200,000 in capital what I would do is consider some investment options. Here's a few ideas:

1. Now is a REALLY good time to find cheap real estate that will cash flow. If you know where to look, you can find like small houses or condos that go for under 50K. You could buy the first one then mortgage a second one with maybe 20% down. You could mortgage another and still have plenty of money left. (50K for first, 25K for second, 25K for third so you've spend a little over 100K with closing cost and what not)

Now you would have 3 properties with maybe 850/month rent each. You would have very small mortgages on two. Revenue around $2,500/month; interest expenses less than $200/month plus probably another 500 for taxes/ and maybe 500 for association. Bottom line is definitely over $1,000K a month in profit. Dollar cost average the other 100,000 into an ETF like VOO over the next two years for dividend income and long term capital appreciation.

2. Just go all in on the stock market over maybe the next 2 years. Look at Vanguard ETF's that mirror S&P 500.

3. If you have a skillset and a great business idea, you can start a small business for 200K easily. Start slow and build over time. Good luck.

If the bank gave me a million dollars I'd pull a Jack Reacher on them. It's not how things used to be. At the time it's very hard to get a loan of any sort. To give you an example, my uncle and my pops owned a pharmaceutical research company pulling million dollar contracts from big dog companies like Pfizer and Merck. One of the managers botched some of the samples due to mishandling the temperature controls in one of the freezers and suddenly the deals came to a hault, they didn't lose the clients luckily but they got a slap on the wrist which felt more like a drop kick from space to us because we were out of money within the space of 6 months. They tried to secure loans for business capital and I remember my Uncle showed me the stacks of credit cards they had saved up "just in case". They used these cards at least once every month to keep a solid credit score as well, but despite their rating and the assets they had it didn't matter not a single bank would not give them a business loan. 10 years ago 10 banks would finance them simultaneously without a hitch.

Quote: (01-27-2014 07:09 AM)Irishman Wrote:  

I am interested in knowing how you can leverage relatively small amounts of savings into a larger business loan, how these loans are typically paid back and what the best routes are for seeking investment.

Private equity, not a bank. Simple as that.

You need to go into at least some basic detail of your business idea if you want further advice -- the strategy for money-raising on a capital-intensive business vs an IP-based business is vastly different, especially when it comes to leverage.

I tried to get a business loan from my local bank. 20 years a good client. Had my mortgage through them. I was willing to put more than enough assets into the business to cover the loan if it defaulted. They wouldn't give me the loan. I asked them why. The bank manager told me quite frankly he didn't care if the chairman of Ford Motors came in to ask for a business loan, the chairman was going to legally back up payment with his personal assets.

So I'd say if you want a business loan, go to your wealthy uncle or be willing to put everything on the line.

Quote: (01-27-2014 11:45 PM)Sawyer Wrote:  

I tried to get a business loan from my local bank. 20 years a good client. Had my mortgage through them. I was willing to put more than enough assets into the business to cover the loan if it defaulted. They wouldn't give me the loan. I asked them why. The bank manager told me quite frankly he didn't care if the chairman of Ford Motors came in to ask for a business loan, the chairman was going to legally back up payment with his personal assets.

So I'd say if you want a business loan, go to your wealthy uncle or be willing to put everything on the line.

Thanks for sharing.

Its always good when posted start with 'I tried' instead of 'I think'.

Its seems private investment is the way to go. I am pretty new to the whole investment/financing game so will take a bit of time till I am up to speed. Again this is all just a thought experiment, for now I am busy stacking cash to use at a later point.

Quote: (01-27-2014 06:00 AM)Maciano Wrote:  

Quote: (01-27-2014 04:13 AM)Beyond Borders Wrote:  

Quote: (01-27-2014 04:02 AM)Maciano Wrote:  

It's not what you need.

It's who do you know.

For bank loans?

Are you sure about that. Expand, please.

OK, my comment was a little too brief, but what I meant was that bankers often are just like regular people and are more lenient towards lending if they know you, if they like you and if they think they can trust you than if you're a stranger. It sure helps if you know certain people from university or sororities. Bankers are very careful these days. They don't give loans to anybody because they fear the investment will be lost and they'll suffer the consequences. However, if they think the investment is safe with you, they will be MORE likely to give you a loan.

It's like writing a job letter for a vacancy. You'll be competing with 100s if not 1000s of potential candidates. However, if you knew somebody in your network who could squeeze you in, you'd have a much better chance of landing the job, regardless of skills that set you apart from 1000s of others.

At a bank I don't think so. My uncle does this for a living and he's got protocols in place that if people don't hit he just can't lend no matter how much he likes them loves them wants to fuck them or whatever. To do so would be compromising his position and his career. This isn't a vouching system like a referral letter, this isn't a gut feel thing...this is business and it's highly regulated. If all the check boxes aren't ticked it doesn't matter who you are you're not getting jack shit.

Quote: (01-27-2014 04:02 AM)Maciano Wrote:  

It's not what you need.

It's who do you know.

Not really.

Money will be thrown at you when you least require it. It's thrown at you because you have a outstanding credit score and life is going along swimmingly i.e. there's no pressure to acquire it.

It's the credit score; it's ALWAYS the credit score...

2 million in the bank, lol

Last year more money was loaned out in private funding compared to banks.

For years the banks have been the gatekeepers when it comes to getting money to buy real estate or start a business.

I really think that will all change with crowd funding sites like the one below.

https://angel.co/

Quote: (01-29-2014 12:58 PM)WestIndianArchie Wrote:  

2 million in the bank, lol

thats the best answer so far

if you had a 2 million dollar loan.......nothing stopping you from defecting. take the capital over seas,buy foreign passport and live out your retirement !

Quote: (01-29-2014 02:48 PM)jimukr104 Wrote:  

if you had a 2 million dollar loan.......nothing stopping you from defecting. take the capital over seas,buy foreign passport and live out your retirement !

loans are generally given to you on as needed basis. for example, if you're building a building, you wont get the money for the whole thing at once - in fact you have have built it first then get reimbursed.

banks aren't that stupid