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Borrowing Basics

Some small business persons cannot understand why a lending institution refused to lend them money. Others have no trouble getting funds, but they are surprised to find strings attached to their loans.

Such owner managers full to realized that banks and other lenders have to operate by certain principles just as do other types of business.

This Folio discusses the following fundamentals of borrowing:

• Credit worthiness.
  
• Kinds of loans.
  
• Amount of money needed.
  
• Collateral.
  
• Loan restrictions and limitations.
  
• The loan application.
  
• Standards which the lender uses to evaluate the application.
  

Inexperience with borrowing procedures often creates resentment and bitterness. The stories of three small business persons illustrate this point.

"I'll never trade here again," Bill Smith said when his bank refused to grant him a loan."I'd like to let you have it, Bill," the banker said,"but your firm isn't earning enough to meet your current obligations."

Mr. Smith was unaware of a vital financial fact, namely, that lending institutions have to be certain that the borrower's business can repay the loan.

Tom Jones lost his temper when the bank refused him a loan because he did not know what kind or how much money he needed."We hesitate to lend," the banker said,"to business owners with such vague ideas of what and how much they need."

John Williams' case was somewhat different. He didn't explode until after he got the loan. When the papers were ready to sign, he realized that the loan agreement put certain limitations on his business activities.

"You can't dictate to me," he said and walked out of the bank. What he didn't realize was that the limitations were for his good as well as for the bank's protection.

Knowledge of the financial facts of business life could have saved all three the embarrassment of losing their tempers. Even more important, such information would have helped them to borrow money at a time when their businesses needed it badly.