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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:

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:

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:

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:

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