If you are a current business owner, or perhaps have the vision that you would like to become a business owner, then you must recognize that having sufficient capital is a prerequisite to accomplishing your business goals. Debt (borrowed money) is one form of capital, and many business owners obtain debt by applying for a loan at a local bank or lending institution.

Obtaining a line of credit for your business may initially appear to be a daunting task. What do banks look for when extending a line of credit to a prospective business owner? How should you present your request to the bank? How do you negotiate the best terms for your loan? How much should you ask for and how do you plan to repay the debt?

Banks or any lending institution will consider many factors before extending a line of credit to a company. One of the primary considerations is collateral. Collateral is security (assets) pledged for the payment of a loan. In the event that a company defaults (cannot repay) on the line of credit, the bank must be assured that there are sufficient assets to cover the debt. The quality of your assets will be instrumental in the loan approval process and will also have a significant impact on the terms (interest rate, fees, covenants) of the loan.

Below is a brief list of common assets that may be used as collateral, as well as questions that might be answered before applying for a business loan.
• Inventory: How quickly are you selling through your inventory? Does your inventory have obsolesce (becoming outdated or outmoded)?
• Account Receivables: What percentage of total sales does/(will) each of your customers represent? How many days does it take to collect on your receivables? What is your dilution rate (Returns, allowances, credit losses, discounts and other offsets against accounts receivable)? Description of major customers?
• Property, Plant & Equipment: What is the market price of your fixed assets? What depreciation method are you using to assess your fixed assets?
• Investments: What is the value of your portfolio? What types of investments are included in your portfolio?
• Life Insurance (i.e. key person-Business owners insurance): What is the amount of the cash value portion of your life insurance?
• Trademark: What is the appraised value of the trademark?

If you are in the market for a loan for your business, we at Optimum can provide you with the valuable advice needed in order to get the loan with the most competitive terms. We’ll start by reviewing all the factors which will be reviewed by the bank and help you decide on the total amount of the requested loan. We can also assist you in developing the most appropriate format to present to the lending institution and coach you on how to negotiate for the best terms. Let Optimum direct you to a representative at one of the banks in our support network of partners who have been carefully screened for their willingness to work with small business owners.

Written By: Lloyd Cambridge, CFO of Optimum Capital Management
For questions call 718-623-3423 or email Lloyd@optimumcapitalmanagement.com