A Guide to Business Credit
for Women, Minorities, and Small Businesses

The need for financing is a critical and perennial concern for the owners of small businesses. Indeed, few things are as crucial to the health of a small business operation. Many small businesses are launched by the personal resources of their owners. But they can quickly reach the stage where the owner
must look to the credit market for financial help in expanding operations. The banking industry is an important source of working capital. However, entrepreneurs may not realize that applying for commercial credit is a more customized process
than obtaining consumer credit, and requires a great deal of preparation by the business applicant. This brochure may help to de-mystify the process and improve your chances of getting the credit you need.

Types of Loans

Banks and other financial institutions can assist you by providing funds through personal or commercial credit. Examples of personal credit include automobile loans, credit cards, and home mortgages. Commercial credit includes business loans; here are some of the options: Short-term loans are one of the most common types ofbusiness loans and are usually for less than one year. They canprovide interim working capital for a business temporarily in need of cash, and are typically repaid in a lump sum when inventory or accounts receivable are converted into cash.

Intermediate-term loans are often used for a business start-up, the purchase of new equipment, expansion, or an increase in working capital. The maturity dates range from one to three years.

Long-term loans generally are made for major capital
improvements, acquiring fixed assets, or business start-ups.
The term of the loan runs for periods of three to five years
and is usually based in pan on the life of the asset financed.
Repayment is usually made in monthly or quarterly installments.

A line of credit offers you the ability to borrow money
repeatedly, up to your credit limit, without having to reapply.
A line of credit is particularly important to businesses that
experience seasonal fluctuations. The lender generally will
perform a review once a year, at which time the borrower is
asked to provide updated financial statements.
The Credit Application Process
Applying for commercial credit can be tedious. It calls for
more documentation than you might initially have expected and
certainly a lot more than when you apply for consumer credit.
For lenders, extending credit to an entrepreneur usually means
customizing the loan to suit the credit needs of that business.
So don't be disheartened by the amount of paperwork needed to
accompany the application. Instead, be prepared!

Among the best assets you can bring to the lender is a well thought-out and documented business proposal. You need to
clearly state the purpose of the loan (will the money be used
for temporary working capital, buying equipment, or expanding
facilities); the amount of funds needed and for how long; and a
repayment schedule. Your business proposal should include the
following information:

* business description that tells the nature of the
business, describes the product and its market, identifies
its customers and competition.

* personal profile that outlines the background and
experience of each of the principals in a resume.

* proposal that states the type of loan requested and its
purpose.

* business plan that outlines your corporate strategy. for
the next three to five years; it will aid you and the
lender in determining whether the business will generate
the cash flow needed to repay the loan.

* repayment plan that tells how you propose to repay the
loan or outlines a repayment schedule. The lender will be
expecting you to repay the borrowed funds from the profits
produced by the business. As a contingency, you might need
to develop a plan on how you would repay the loan if the
profits alone turned out to be inadequate.

* supporting documentation will include copies of pertinent
papers that support the information contained in your loan
proposal--for example, a lease, certificate of
incorporation, partnership agreement, letters of reference,
contracts, invoices or vendor quotes.

* collateral that you will use to secure the payment of the
loan. Collateral can include business and personal assets
such as inventory, equipment, and accounts receivable or
real estate, stocks, bonds, and automobiles.

* financial statements, both personal and for the business.
The business financial statement should be provided for
the last three to five years of operation including a
year-to-date interim report. It should contain a balance
sheet showing business assets and liabilities, and a
profit-and-loss statement showing revenues and expenses.
The lender uses this information to calculate a
debt-to-worth ratio for the business. Be prepared to
provide copies of tax returns for the business for this
same period.

The personal financial statement should list your assets
and your liabilities. Identify the names in which title to
each asset is held and its fair market value. You should be
prepared to provide copies of your personal tax returns.
You may be asked for a list of credit references. Lenders
will check your personal as well as your business credit
rating.

Lenders will carefully examine your financial statements
and business projections. As a borrower, you must be fully
prepared to answer questions about them.

* personal guarantees of the owners or other principals
usually are required, even from an established business.
The lender also may request another party's guarantee such
as a cosigner or a surety, or may request a government
guarantee from the U.S. Small Business Administration or
other government agency.

In addition to the personal guarantee that you give,
under the Equal Credit Opportunity Act the lender is
allowed to require another person's guarantee should your
application fail to meet the lender's standards of
creditworthiness. If all or most of the assets listed on
your personal financial statement are owned jointly with
your spouse, or with someone else, the lender is likely to
require such a guarantee, But the lender may not require
that your spouse be the guarantor,

In the case of secured credit, the lender is allowed to
obtain a spouse's signature on certain documents when the
applicant offers, as security for the loan, property that
the two own jointly, In this case, the spouse or other
co-owner may be asked to sign documents--such as a
mortgage or other security agreement--that would be
necessary under applicable state law to make the property
available to satisfy the debt.
Sources of Technical Assistance
Before you approach a lender, you might want to seek the
advice of another, more experienced "set of eyes" to review your
business proposal, particularly if you are a first-time borrower. By doing so, you'd be getting the loan package in shape to make it easier for the lender to reach a favorable credit decision. There are some business support groups whose members could counsel you on how your package looks. A qualified counselor might even discover that you really don't need more money, and instead suggest better inventory control, improved marketing techniques, or other changes that could actually solve your growth problems. One source of counseling available to small businesses is the Service Corps of Retired Executives (SCORE), which is sponsored by the U.S. Small Business Administration. Others might include accountants and financial advisers.

Once you are satisfied that your proposal is in good shape
to present to a lender, set up an appointment to discuss your
application. You will find that the lender can also be an excellent source of business and financial counsel.
If Your Application Is Not Approved
Most lenders, banks especially, are conservative in granting business loans. Given the obligation to their stockholders and depositors, they need to be sure there's a good chance the loans they make will be repaid.

If your application for credit is not approved, find out
the reasons why. Some of the reasons that lenders often give
for denying a business loan include, for example, insufficient
owner's equity in the business; lack of an established earnings
record; a history of slow or past-due trade or loan payments;
or insufficient collateral. Finding out the reasons may help
you qualify the next time you apply.

The lender will keep you informed about the status of your
application. If you are considered a "small business" (when
your business revenues are $1 million or less, or when you are
applying to start up a business), a lender has 30 days to let
you know, either orally or in writing, whether or not you get
the loan. The 30-day period begins after the lender has
received all of the information needed to evaluate your credit
request. If your application is denied, the lender must give
you either:

* a written statement of the reasons for denial, or

* a written notice telling you of your right to obtain the
reasons in writing. This notice may be given to you during
the application process or at the time of the denial.

The lender also will keep for one year the records relating
to your application.

Different rules apply for larger businesses (those with
more than $1 million in revenues}. Within a reasonable period
of time after getting all the necessary information on which to
base a decision, the lender must decide and let you know
whether or not you get the credit. Then you'll have 60 days in
which to ask for a written statement of the reasons why you
were denied credit; this is important to remember because the
lender need not notify you of this right. The creditor will
keep records of your application for at least 60 days after
telling you of the credit decision. If you request that records
be kept longer, or ask for a written statement of the reasons
for denial, records will be kept for one year.

Equal Credit Opportunity Act

Obtaining credit can be a difficult process for any business owner and especially for first-time borrowers. But keep in mind that different lenders have different standards; if you did not meet the standards of a particular restitution, you may still qualify elsewhere. If you have a full understanding of why the initial lender didn't approve your application, with time and more attention to these areas, you can improve your proposal as a result and may succeed the next time you apply.

Women and minority applicants may be concerned that they
have received less favorable treatment which is unrelated to
their creditworthiness. All business applicants have certain
protections against unlawful discrimination under the Equal
Credit Opportunity Act. The Act makes it illegal for lenders to
deny your loan application, discourage you from applying for a
loan, or give you less favorable terms than another applicant
because you are a woman or a minority group member.

Under the law, a lender may not take factors such as sex,
race, national origin, or marital status into account.

In addition, the lender may not ask for information about
your spouse unless your spouse has some connection to the
business, or unless you are relying on your spouse's income to
support your credit application or relying on alimony, child
support, or separate maintenance payments to establish
creditworthiness. But the lender may ask you for information
about your spouse if you are living in, or you are relying for
security on property located in, a community property state
(Arizona, California, Idaho, Louisiana, Nevada, New Mexico,
Texas, Washington, or Wisconsin).

Whether your business is large or small, if you are not
granted the credit, be sure to discuss any questions you may
have with the lender.
If You Need Help
If you are not granted credit by the lender and you believe the lender may have acted unlawfully, you can seek further assistance from the regulatory agency that supervises the institution. A list of some of the agencies is contained in this brochure for your reference. If it becomes necessary to seek legal assistance, the Act provides some remedies. If you have been denied credit because of unlawful discrimination and are able to prove it, courts may award actual damages and in some circumstances may impose punitive damages against the lender. If a lawsuit alleging discrimination is successful, the court also may award court costs and attorney fees.
Federal Enforcement Agencies

All creditors are subject to the Equal Credit Opportunity Act (ECOA) and Regulation B (issued by the Federal Reserve Board), which contains specific rules governing credit transactions. The following is a list of the federal agencies that enforce the ECOA and Regulation B for particular classes of financial institutions. Any questions concerning a particular financial institution should be directed to its enforcement agency.

State Member Banks of the Federal Reserve System
Division of Consumer and Community Affairs
Board of Governors of the Federal Reserve System
20th & Constitution Avenue, NW
Washington, D.C. 20551
(202) 452-3946

Non-Member Federally Insured Banks
Office of Consumer Affairs
Federal Deposit Insurance Corporation
550 Seventeenth Street, NW
Washington, D.C. 20429
(800) 424-5488
(202) 898-3536

National Banks
Compliance Management
Office of the Comptroller of the Currency
250 E Street, SW
Washington, D.C. 20219
(202) 874-4428

Federal Savings Association
Consumer Programs Division
Office of Thrift Supervision
1700 G Street, NW, Fifth Floor
Washington, D.C. 20552
(202) 906-6237

Small Business Investment Companies
U.S. Small Business Administration
409 Third Street, SW
Washington, D.C. 20416
(202) 205-6751

Federal Credit Unions
Office of Consumer Programs
National Credit Union Administration
1776 G Street, NW
Washington, D.C. 20456
(202) 682-9640

Finance Companies and Other Creditors Not Listed Above
Division of Credit Practices
Bureau of Consumer Protection
Federal Trade Commission
Washington, D.C. 20580
(202) 326-3224
Alternative Sources of Capital
The U.S. Small Business Administration (SBA), the federal
agency created specifically to assist and counsel small businesses, suggests the following sources of capital in addition to banks:

Friends, Relatives, Individuals
Savings and Loan Associations Insurance Companies
Finance Companies
Mortgage Companies
Small Business Investment Companies
Venture Capital Firms
State Government Financing Sources
Pension Funds
Government Agencies (such as SBA)
Private Foundations