By Sandra Taylor Sawyer: Guest columnist
For the small business owner who is seeking financing it sometimes seems to come as a shock when a lender requests a copy of a personal financial statement and signing a release for a credit check.
Most small businesses operate as sole proprietorships or partnerships and as such the owner(s) are responsible for the liabilities that may be incurred by the business. It is therefore routine procedure to include a personal finance statement as part of any business plan and loan application.
The personal finance statement will list the assets of the individual including such items as cash (checking and savings account balances), notes (owed to the individual), certificates of deposit, life insurance (if it has a cash value), securities (stocks, bonds, etc.), real estate (market value), vehicles (market value), individual retirement plan account value and household goods.
Liabilities that must be listed include current bills owed (usually credit card balances), mortgages on real estate, outstanding loans and unpaid taxes. The difference between assets and liabilities is called net worth, which is what the lending institution will look at as potential collateral to secure the loan granted to the business.
What all of this means to the business owner is that if he or she wants to get financing for starting, acquiring or expanding a small business, he or she must first look inward and get their personal finances in order and increase net worth. Banks and other lending institutions will not allow commercial loans to be used to pay off personal debt items such as credit card balances. It is wise to pay off credit cards prior to requesting a business loan (guaranteed or not).
It is prudent to obtain a copy of a personal credit report months before requesting a loan. Many times these reports contain incorrect and damaging information that will diminish the chances of getting a loan. It is imperative to have these items removed and it takes time to do this. The federal government mandates that every citizen can obtain a free copy of their credit report annually. Contact Annual Credit Report Request Service at P.O. Box 105281; Atlanta, GA 30348-5281 or www.anuallcreditreport.com, to obtain free credit reports.
Sandra Taylor-Sawyer is director of the Small Business Development Center at Clovis Community College. Call the center at 769-4136 or visit www.nmsbdc.org/clovis. Jim Casey, retired business counselor, contributed to this article.