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

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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 of business loans and
are usually for less than one year. They can provide 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 shap
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

To request additional copies of A Guide to Business Credit for Women,
Minorities, and Small Businesses, please send your name, address, and
the number of copies requested to Publications Services, Board of
Governors of the Federal Reserve System, Washington, D.C. 20551.

FRB 4-100,000-0892-C

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