Question

NO HANDWRITTEN ANSWERS PLEASE

A-Why don’t banks typically lend money to new businesses and if they do, how do they lend money?

B-What are the principles that bankers operate on?

C-As a requirement to submit an SBA application, what important factors do lenders take into consideration when reviewing your loan application?

D-Describe SBA’s Loans Involving International Trade, and Disaster Loans.

Answer 1

A. The banks do not typically lend to new institutions since the backs cannot reply on the profitability of the business on the long run. Since there is no credit history of the business, the bank cannot take a call whether the business will be able to pay back the loan. Sometimes the banks give out a portion of the loans along with government as start-up costs for Small Business Administration (SBA). Since the government is involved, the risk to bank is reduced.

B. The principles that bank relies on are

1. The liquidity of the business wherein the banks look at how fast the credit sales get converted to the cash or they look at the cash conversion cycle (Liquidity)

2. The history of the business in terms of paying back loans that were taken some previously (Safety)

3. The banks look to diversify lending to different industries since each of them will have a different business cycle (diversity)

4. The banks look at whether the business is stable and can in run on the long term (Stability)

5. They look at how profitable the business is (Profitability)

C. The important factors are:

1. Credit score of the business owner who applies for the SBA

2. The extent of government funding the business has got till date.

3. The business model and whether there are competitors and whether they adhere to the business cycles of the industry

4. Nature of business activity to make sure they are not involved in anything harming the society at large.

D. SBA can give out loans if the small business wants to expand exports or develop new export markets. They may also have to prove that the business has been adversely affected by import competition and the proceeds can improve the overall competition in the business.

SBA can also give out disaster loans are given to businesses, homeowners and renters who are staying or doing business in disaster affected areas. The areas must be declared disaster areas. In such cases you can borrow upto $200,000 for repair or construction of new property.