Credit Tightening

Written by: Steve Dusek

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I Have a Dream… and Need a Loan!

This dream of yours has been pestering you for a while.

You’ve done your homework and have spent countless hours writing a business plan, working and reworking financial projections, and studying the market and competition. Perhaps you’ve even dabbled in this dream as a hobby, but now you’re ready to take it to the next level. All you need now is some cash to make it happen.

You have a little saved up but not enough to venture out without some additional resources. So you do the next logical thing: go talk to your bank or credit union.

You present your plan and make the best possible case for the new business you are ready to launch. That’s when the questions start:

“How much do you need? How much do you have available to put into the project yourself? What will you be using the money for? How is your credit history? Do you have any collateral you can pledge for the loan? What is your experience in this industry? Is the projected cash flow sufficient to make your loan payments? How do you intend to cover working capital needs?”

As you break out in a nervous sweat, you realize there’s more to this than you expected.

Traditional bank or credit union lenders are asking these questions to determine the following things:

1.The strength of your credit history and character

Do you have a history of paying all your payments on time or do you have a few unsightly blips that you’d rather not discuss? Perhaps some late payments or a medical bill that you couldn’t pay that went to collections or even a prior bankruptcy. These are indicators of your future ability to pay back a new loan.

2. Your capacity to repay a new loan

Have you thoroughly planned your financial projections, or are there obvious things missing? Do you have any additional sources for repayment like income from another job or business? Do you already have more debt than you can handle? These things determine if you will have the ability to actually make the new loan payments, even if the best execution of your plan doesn’t result in the expected sales and cash flow for your new business (which is very common, by the way).

“… the borrower is able to secure financing with the intent that, in a couple years, they will have the proven, historical performance to secure a traditional loan with better rates and terms.”

3. How much money (capital) you have to put toward the project

Generally speaking, the more you can put down in cash yourself, the less likely the loan is to default. What that means is: You have more skin in the game, and the lender isn’t on the hook for the whole loan if things don’t work out as planned.


4. How the loan will be collateralized

So if the business doesn’t go as planned, what assets (real estate, equipment, inventory, etc.) would be sold to settle the debt? Keep in mind that real estate has an appraised value, but everything else really becomes a small value when you try to sell it compared to the original purchase price. So, if you borrow $100,000 for equipment and inventory, it may only be worth $10,000-20,000 in a re-sell situation leaving a large balance that you will need to come up with in other ways to pay off the loan.

5. What conditions are necessary to provide the loan

Based on the above information and the analysis done by your lender, you may or may not qualify for a loan. If you do, the terms might be out of reach for you – perhaps they need more down payment than you can afford, or they require more collateral for the loan.

For many startup businesses, in particular, the stars just don’t align correctly for all of these things to fall into place. As much as they’d like to help, your lender has to tell you no. So you go to another bank, and they say the same thing; this is becoming a more common occurrence as regulations on banks tighten to reduce the number of loans that eventually default.

Now what?


How about considering non-traditional financing options? If your lender is in the know about other programs that are helpful for new-business financing, they may point you to a program such as the U.S. Small Business Administration’s 7(a) Community Advantage Loan, as was the case for a recently opened cidery in Downtown Fargo.

Wild Terra Cofounders Breezee and Ethan Hennings had a vision and were turned down by multiple banks until a local credit union advised them to check into Dakota Business Lending’s Community Advantage program.

What is the Community Advantage Program?

The Community Advantage program is specifically designed to address some of the challenges that prevent a lender from providing traditional loans — most often, that’s the required amount of down payment from the borrower, as well as shortfall on collateral value. With this program, the borrower is able to secure financing with the intent that, in a couple years, they will have the proven, historical performance to secure a traditional loan with better rates and terms. In essence, this program provides a path to bankability for a new business, and it gives them a means to start and eventually establish a commercial banking relationship in the future.

The Hennings needed a loan for leasehold improvements, furniture, fixtures, equipment and working capital. Because they didn’t have enough down payment and collateral to meet traditional financing requirements, the Community Advantage Program was a great fit for them. They had worked with the North Dakota Small Business Development Center for assistance with their business plan and projections, so they had a solid plan to start with.

Then, we were able to check other items off the list, gain confidence in their ability to run the business and provided the financing to get them funded to launch Wild Terra.

Once they have a couple years under their belts — perhaps sooner if things go well — they will be in a position to get commercial financing and replace the Community Advantage loan with better rates and terms.

Dakota Certified Development Corporation (Dakota CDC)

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Steve Dusek is the president and CEO of Dakota Business Lending. He has over twenty-eight years of experience in managing and delivering non-traditional lending solutions for small business in rural America and in maintaining successful business cultures.