Home Loan Tips: Avoid Mortgage Troubles, Other Pangs of Rising Interest Rates

Home Loans

As any real estate agent knows, home sales heat up with rising temperatures every summer. Now, with mortgage interest rates more than a full point higher than at this time last year, fuel costs riding high, higher minimum credit card payments and consumer debt still raging, many U.S. homeowners risk foreclosure on their homes, but they don't have to lose their slice of the American dream.

"Last year, 31 percent of home loans issued were adjustable-rate mortgages [ARMs], which could spell big trouble as fixed mortgage rates hover around 6.83 percent and ARMs are poised to go much higher," said Brad Stroh, chairman of Bills.com. "Holders of ARMs will be paying an additional $14 billion annually for every 1 percent increase in mortgage rates. People who bought homes at the edge of their spending ability with an ARM could face dire consequences as their mortgage payments increase, but they can take steps to keep their financial situations in check."

According to the Mortgage Bankers Association of America, 4.7 percent of U.S. mortgages were delinquent at the end of 2005. With $9 trillion in outstanding U.S. mortgage debt, that places $423 billion at risk of foreclosure. Homeowners who are at risk (as well as prospective homeowners) can use the tips below to avoid mortgage trouble.

How to prevent mortgage problems:

• Create a budget and don't stretch yourself too far. The unexpected can and does happen to millions of Americans each year. For people who live at the far edge of their means, one life event can hijack their lives and lead to defaults on bills and/or mortgage payments. The key is to build a detailed budget of income and expenses, making sure to allow some breathing room to weather an unexpected downturn.


• Be very careful with ARMs or interest-only loans. These types of loans let borrowers qualify for more expensive homes - but beware as rates (and payments) climb. If you can barely afford the payment on your ARM or interest-only mortgage, you are asking for trouble in a few years when the "teaser period" expires and your loan re-sets to a fixed rate.


• Be sure you have extra cushion in your budget with these loans.
  Don't jump to refinance your home to pay off credit card debt. Many people faced with large credit card debt or other unsecured debts consider refinancing their homes. But this strategy only moves the debt, securing it with your home. That puts your home is at risk of foreclosure if you are unable to pay. If you are not confident that you can keep up with your home loan payments, consider debt resolution or another debt relief option.
  

"We can't emphasize enough that people must educate themselves about what they are getting into with a mortgage," Stroh added. "Overall debt problems will continue to escalate unless people rein in their spending to live within their means. Unfortunately, for some people, that may mean losing their home to resolve their financial situation."How to avoid foreclosure - if it's already on its way:

• Enter into a forbearance agreement. For a temporary hardship, lenders might grant a forbearance agreement to lower - or eliminate - payments for a limited time.


• Consider loan modification. A loan modification seeks a permanent change to the loan, such as lowering the payment and extending the loan's term, or incorporating any delinquencies into future payments.


• Obtain a "deed in lieu" of foreclosure. A "deed in lieu" essentially allows the borrower to return the title or deed of the property - giving the home back - to the mortgage holder to avoid foreclosure.


• Sell the home. Selling your home may not be ideal, but it is a way to avoid foreclosure proceedings on your house and pay back your lender.


• Refinance the loan. It may be possible to refinance your mortgage for a lower interest rate and/or lower monthly payment (this is much different than refinancing to take cash out to pay off credit cards). However, if you already have had late payments on your mortgage, the interest rate offered to you may be too high to lower your monthly payment. Educate yourself on current rates by checking online rate comparison sites and using online calculators to determine the real costs of refinancing. These tools are available on a number of Web sites, including http://www.bills.com/calculators/


• Be cautious. Be wary of so-called equity skimmers. If your house is facing foreclosure, you will probably receive numerous solicitations from companies looking to "help" you prevent foreclosure by offering to sell your home for you or by taking ownership of your home. In most cases, these solicitations are scams trying to take advantage of people in difficult situations. The perpetrators aim to snatch the equity you have built up in your home.
  

In many states, foreclosure rates have already started to increase, especially impacting the segment of the population that carries adjustable-rate mortgage loans, whose payments climb upward with every interest-rate increase. However, homeowners can make choices – ideally, before they purchase a home, but even after problems arise - that will help them keep a home, or at least minimize the damage a foreclosure could have on their futures.

Bills.com is a free one-stop online portal where consumers can educate themselves about complex personal finance issues and save money by choosing the best-value products from a network of qualified service providers. Since 2002, Bills.com's partner company, Freedom Financial Network, has provided consumer debt resolution services, serving more than 7,500 customers nationwide and managing more than $250 million in consumer debt.

By: Bills.com on Jul 03 2006 16:26:57

College Student Loan

7 Secrets You Need to Know About College Student Loans

1. Financial aid officers at all the major schools are wined and dined by the big student loan companies. These financial aid offices have set-up a "loan process" with a specific lender. In many cases, this is the federal government, but many colleges are now going with private corporations. The paperwork hassle in dealing with a bureaucracy has become too much for these financial aid officers. In some cases, the financial officer is really a "stand-in" rep. for a student loan company. However, what they are selling or advocating may not be the best deal.

2. Under the Clinton administration the federal government got involved in the student loan process in a big way. Now the private companies are getting the business back. If you are going to a private college you may not be eligible for federal loans.

3. Always consider your options and talk to a financial aid counselor. If you are applying for graduate school, be aware of the fact that there are few scholarships for graduate school relative to undergraduate programs. You may be able to find a scholarship, but in most cases it will not cover the real costs of graduate school. A graduate student loan may be your only option.

4. It is recommended that you go with a loan company that offers all of the following types of loan services:Private Student LoansPLUS LoansFederal Stafford LoansStudent Loan ConsolidationPrivate Consolidation LoansYou want the largest selection possible.

5. Whenever possible lock in a student loan rate. Some loans are based off the Treasury bill. In these cases, the loan rate fluctuates. This can either be really good or bad. When interest rates go up, you may want to restructure the loan.

6. Pick a fixed student loan rate and start date to do a side by side comparison. Make sure that you are comparing apples to apples when student loan shopping and checkout numerous student loan companies before making a decision.

7. Never borrow more than you absolutely need. Compound interest can make a small student loan turn into a huge amount. Don't take out extra money and play the stock market or try to get rich quick. This scenario almost never works out for college students. Moreover, in most cases it is a violation of the student loan agreement.

Car Loan Tips

How much can you afford to pay for a new car? Should you finance your new car at the dealer or get a car loan from a local bank or credit union. Financing a new car purchase requires some research if you want to get the best rates and lower your monthly payments. Before venturing out to the car dealerships uninformed, let's take a look at what you will need to know about the car buying process.

First of all, about 70% of all new car purchases are financed. So unless you plan on paying cash for your new car, or you are going to apply for a car loan, chances are you will be financing your purchase.

1. Determine your financial situation

This is the first and most important step in the car buying process. You must know how much you can spend before you can determine what you can afford. You don't want to get stuck making a bloated car payment that will leave you eating bologna sandwiches for three years. First of all, you need to have a monthly budget. This is very easy to calculate. Add up all of your fixed monthly expenses, such as your rent/mortgage, phone bill, etc. Subtract that from your net income. Then subtract your estimated extraneous expenses, such as food, gas, entertainment, whatever. The result should be an amount of money you have to play with. From that, you need to remember that buying a car involves more than a down payment and monthly payments. In your budget you will need to include licensing, registration and other hidden costs, as well as monthly insurance costs, gas and maintenance. Once you have all of this worked out, you should have a ballpark figure of the budgeted amount you can use for car payments. A good rule of thumb is roughly 20 percent of your net income can be used for a car payment. Once you determine that figure, stay with it.

2. Decide which car you want

Now that you have settled on a monthly allotment, now you can look at which vehicles fit into your price range. This is really about personal choice, but a good criteria to go buy is to look at what your needs are. Do you have a family? There are plenty of affordable, safe and reliable minivans and station wagons on the market. Single and commute, or do a lot of city driving? The compact segment has a wide range of models to choose from that boast handling and superior gas mileage. Do you use your vehicle for work-related tasks, such as hauling, delivery, etc? Check out the many light and heavy-duty pickup trucks and vans. Midlife crisis? There are several convertibles and sports cars that will make you feel young again. Also consider your wants. Compact cars get really good gas mileage and are a great if you want to save money on the increasing gas prices. Plan on taking road trips? Consider something that gets good mileage and has cargo space and lots of cup holders. Plan on going off-roading? The SUV is your best bet. Some even come with a first-aid kit! Once you've narrowed your choices down to a couple, it's time to do some car research.

3. Do your homework

All right, Columbo. Here's where you will need to spend some time sorting through some details, but it will be worth the effort in the end. After all, the more you know about what you're buying, about whom you're buying from, and about the buying process itself, the more money you will end up saving. There are plenty of places for you to do your car research. Check out the Internet and newspapers, contact car dealerships, credit unions and local banks to see what kind of deal you can get. Knowing what a car dealer's competition is offering can only help you out in the negotiating process. Look at interest rates. You'll want to get the lowest possible interest rate, as it will help you pay less in the long run. Many car buyers focus on getting the lowest possible down payment. If a car dealer gives you a low down payment, the money you are saving has to be made back. Car dealers will find ways to lower your down payment, and as a result will find ways to compensate for their generosity. By deferring the down payment "savings," with interest, you'll end up paying more in the long run. Also be aware of factory-to-dealer incentives. The secret is that the manufacturer refunds a certain percentage of the car's price to the dealer. So even if the car dealer sells you a car at the invoice price, he or she will still make money from the deal. Find out about a manufacturer's incentive percentage, as they are public information. You should also look out for rebates. When incentives are offered, this often means the manufacturer wants to either get rid of slow-selling cars or reduce the inventory. Therefore, they may also offer the buyer a cash rebate and a low financing rate, or an option of one of the two.

4. Go to the car dealerships

Now that you have an understanding of what kind of rate you will be offered, you now want to go out to the car dealerships. You already have an idea of what kind of car you want, how much you can spend and what kind of perks you can get. Also you have an idea as to what different car dealerships are offering. This is quite a bit of information for you to carry with you into the negotiating process. But again, the more you know, the better off you'll be. But remember: Car dealers are professional negotiators and do it everyday. You are a novice and will be treated as such. The car dealers aren't going to be easy on you, nor are they going to point out all the ways you can save money. It's up to you to find all of those. Also remember that you are in control at all times. You have the right and ability to stand up and walk out of the office at any point and the dealer will lose the sale. Don't let a car dealer intimidate you. Be relaxed and comfortable you know all the information and that you hold all the cards.

Home loan tips

1. Add up those home loan fees

Once you've saved up the deposit for a home, don't forget to take into account all the extra fees that come with buying a house - some or all of these: stamp duty, legal costs, disbursements, mortgage insurance, pest inspection report, survey report, builder's report, strata inspection report, loan application fee, valuation fee, registration fee, sundry fees like refinancing or switching fees.
On a mortgage loan of $300,000, expect to pay at least $15,000 in fees. With mortgage insurance, this will rise to about $17,470.

2. Additional repayments

Making additional repayments beyond what's required in your minimum monthly repayment is one of the best ways to reduce the total interest paid and term of your loan.

As a rule of thumb, every $1 in extra repayments you make early in the life of your loan saves around $2 in interest over the term of the loan, depending on the level of interest rates.Consider either one-off lump sum payments when you have spare cash or commit to increasing your regular repayment amount.

However, make sure that your loan allows you to make additional repayments without penalty. Fixed-rate and basic (or 'no-frills' loans) often have restrictions on extra repayments or charge a fee for the privilege.

Use BankChoice's Extra repayments calculator or Lump-sum repayment calculator to determine how much time and money can be saved.

3. Ask about 'professional package' discounts

If you're earning more than $50,000 a year, or $80,000 or more with a partner, ask lenders and brokers about the "professional packages". The home loan interest rate is usually discounted by 0.5 per cent on which ever loan you choose. Relationship discounts are also available from banks and credit unions for those borrowers who consolidate a range of planning business with the one institution. Home loan discounts, savings account fee waivers and credit card annual fee waivers are commonly offered.

4. Be careful of 'honeymoon' intro rates

Home lenders entice borrowers to their home loans with attractive low introductory rates. These rates may be up to 2 percentage points below the standard rates for home loans and look therefore look very attractive. But these "honeymoon rates" only last for six months to a year before automatically reverting to the standard rate offered by that lender. By all means take advantage of these discounted rates but don't let them dictate your choice of loan. It is far more important to compare loans by felxibility of features and the standard rate that you will face for years into the future. The 'comparison rate' that lenders must publish for each loan is a much better tool with which to compare the true interest and fees costs of different loans.

5. Beware fixed rates

Attractive when interest rates are rising, fixed-rate loans also lock you in for a fixed term and as such are less flexible than variable-rate loans. You may not be able to make additional repayments or pay the loan out early without facing high penalty charges.

Fixed rate loans suit borrowers who really value the certainty of knowing exactly what their future repayments will be – property investors and borrowers on a tight budget, for example.

Borrowers trying to beat rate rises by picking the right time to lock in to a fixed rate are playing a risky game. Such borrowers are taking a gamble on the future and the longer the period you fix, the more of a gamble it is. Predicting interest rates three to fives years into the future is something akin to picking Lotto numbers.

6. Can't get a standard loan? There are alternatives

If the banks, building societies and credit unions won't lend to you because you're self employed, newly arrived in the country or have a poor credit history, consider the booming non-conforming and "low doc" loan market. A number of non-bank lenders offer loans which especially cater for this type of borrower. The interest rates on non-conforming loans are generally higher but come down after a few years of on-time repayments.

7. Caution the key in current housing market

Home owners and property investors would be wise to adopt greater financial caution amid uncertainty in the outlook for property prices and interest rates. Continued growth in household debt, easy lending practices, top-heavy house prices and the upturn in the interest cycle make a case for protecting yourself against the increasing chances of a property downturn. In the current climate, there are number of simple steps that both prospective buyers and existing borrowers can take to avoid their investment being put at risk:
New borrowers:

• allow for higher interest rates of up to 1 percentage point when budgetting for repayments over the next two years
• maximise your deposit and try to keep your LVR as low as possible, 90 per cent at the most
• ensure personal debts like credit cards and car loans are under control before committing to a property loan
• buy for the long term, short-term speculation is more risky now than ever

Existing borrowers:

• make extra repayments where possible to reduce your exposure to higher rates and falling prices
• consider switching at least part of your loan to a fixed rate BUT check the flexibility of such loan arrangements. Extra repayments? Early payout penalties?
• consider carefully further borrowing against the equity built up in your home – can you afford higher repayments if rates are 7 or 8 per cent?
• rather than for further spending, use home equity finance to consolidate existing higher-interest debt at the lower home loan rate.

8. Check if there are ongoing fees

Many banks now charge monthly or annual administration fees on home loans. When comparing the cost of different loans, don't just look at the interest rate, look at the 'total cost of borrowing'.

Many lenders are using 'average annual percentage rates' (AAPRs) as a means of comparing the true or total cost of loans. Although this measure incorporates fees as well as the interest rate, they can be misleading because an AAPR will vary on a particular loan depending on the amount borrowed.

9. Check your statements for errors

There are claims that more than 50 percent of home loan statements contain calculation errors. Simple mistakes, like the entry of the incorrect balance or the application of the wrong interest rate at the wrong time can be costly and mostly favour the lender. We all make mistakes, even bank computers make them and that's why borrowers should keep a close eye on loan statements. Various software for your home PC is available that can run a check on your statements.

10. Compare loan features, not just rates

The more flexible the loan, the higher interest you'll pay. A variable loan which allows you to draw against repayments or offset savings against the mortgage will have a higher rate than a basic loan. Always compare loans with the same features when looking for the best interest rate.

11. Consider a portable loan

A portable home loan allows you to sell one property and move to a new one without having to refinance, ie. pay out the old loan and take out a new one. This saves application and legal fees.

Most lenders will insist that the loan amount required for the new property is no greater than the existing amount borrowed.

12. Do you need a redraw facility?

A redraw facility allows you to make additional repayments on your mortgage, and then have access to the additional repayments if you need to.

However, the facility is normally only available on "Standard Variable" loans, which are more expensive than basic variable loans. Before you choose the more expensive loan, make sure you understand the conditions attached to the redraw facility as it may include a minimum amount and a fee every time you use it.

13. Do your homework

There are so many home loans on the market these days with an increasing variety of rates, fees and features that it really pays to shop around. Our home loan selector is designed to make comparing what's on offer much easier.

14. Don't fall foul of the taxman

If you're an investor in rental property, take a note of these common problem areas the ATO finds with deduction claims. Legal fees are only deductible if they're associated with taking out a loan to buy property - not for the actual purchase. These fees can be claimed along with other borrowing costs but not in the year of purchase. They must be depreciated over the life of the loan. Another deduction scrutinised by the Tax Office is depreciation, relatively easy to calculate for new properties but harder for established homes. Investors may try to determine these on their own but can pay a quantity surveyor to do it. This usually costs at least $500 but often results in a higher depreciation claim. The other area targeted in ATO audits is travel expenses associated with rental properties. Travel claims are allowed for the investor to do repairs, collect rent or carry out inspections. The property does not have to be interstate. A yearly per-kilometre claim can be made no matter where the property is.

15. Don't rely solely on comparison rates

All lenders must now include "comparison rates" in advertisements for their home loans and personal loans to help consumers get a feel for their total cost - fees and the interest. Don't rely solely on comparison rates when choosing a loan and beware of their shortcomings. They only take into account fees and interest rates, not the features and how suitable the loan is for your circumstances.

16. Ensure your mortgage broker really delivers

Getting a broker to arrange your loan can certainly save a lot of time and hassle, but borrowers really must ensure the service they expect is the one that's delivered. Ensure the broker fully explains in writing why his or her loan recommendation is the best for your circumstances, not just the loan that earns the most for the broker. Ensure brokers also fully outline all upfront and ongoing "trail" commissions they will earn from lenders for your loan business. Never pay a broker a fee yourself unless the broker is prepared to rebate some or all of their commission earnings to you in return.

17. Keep accurate records

Keep accurate records of your deposits and ATM transactions. It is also wise to keep copies of your loan application and approval documents in a safe place.
This is the best way to avoid hefty fees which may be charged by a bank when its customers want to see copies of their cheques or loan files.

18. Look beyond the banks

Get a feel for what's on offer across the wide range of financial providers around these days. Credit unions, building societies, mortgage originators, community banks and boutique online or telephone banks may offer better interest rates or lower fees than the big banks because they are anxious to win new business or they are non-profit organisations.

19. Look for flexibility

When taking out a loan make sure it offers the flexibility to meet the changing circumstances you will undoubtedly experience over the 10 to 25 years of your loan. The ability to make extra repayments, redraw extra repayments, fix the rate on a portion of the loan, or refinance to another loan if need be are all features to be considered.
Most fixed term and rate loans and some basic loans don't allow you to make additional repayments, or charge a penalty for doing so. Make sure you understand the terms and conditions before taking out your loan.

20. Make the most of rate falls

If monthly repayments drop because interest rates have fallen, try to maintain the old repayment levels. This means you will pay off more of the principal with each repayment, reduce the term of your loan and the total amount of interest paid.

21. Make your surplus cash work harder

Use cash savings to help pay off your loan quicker. Remember the old saying 'a dollar saved is a dollar earned'? If you have a home loan at 7 per cent, every extra dollar you pay off the principal is another dollar you are not paying 7 per cent on each year. If you instead put that extra dollar into a savings account you are only going to earn 2 or 3, perhaps 5 per cent at the most. Therefore putting savings into your loan earns you twice as much as a savings account.
These days, redraw facilities available on most standard variable loans allow you to take back those extra payments if needed anyway. See also ‘Offset accounts and all-in-one loans’ below.

Use BankChoice's Extra repayments calculator or Lump-sum repayment calculator to determine how much time and money can be saved.

22. Pay your loan off quicker with fortnightly or weekly repayments

Converting your monthly repayment into two fortnightly or four weekly payments can reduce the term of your loan in two ways:

• because there are more than two fortnights or four weeks in every month, dividing your original monthly repayment into two or four means you actually pay more over the course of a calendar month.
• when interest is calculated daily, the more frequent repayments result in less interest being charged to your loan over the course of a month.
  

23. Quit smoking

If you smoke a pack of cigarettes a day, it is costing you almost $3000 a year. Quit, and put the daily saving of $8 or so aside and pay an extra $240 each month off your mortgage.

Use BankChoice's extra repayments calculator to see how much you can save and how quickly you’ll repay the mortgage (but it won't tell you how much longer you will live as a result).

24. Save interest with offset accounts

Offset accounts not only save you home loan interest, they help beat the taxman as well. Savings in offset accounts are subtracted from the outstanding loan amount each month so interest is charged only the net amount. Interest paid in cash to your savings account is taxable, but the same interest used to offset home loan interest is not – a tax effective way to reduce you home loan. However, to get the most from an offset account, look for accounts which offers a 'full offset', ie. paying interest at the same rate charged on your home loan. Redraw facilities and line-of-credit loans make use of your savings in much the same way.

25. Save with a line-of-credit loan

Disciplined borrowers can make use of the increasing range of line-of-credit loans, also called salary account or all-in-one loans, which offer the chance to make every spare dollar work to reduce your home loan. These loans allow your income to be paid directly into the loan account to reduce the loan outstanding sooner than waiting for the repayment due date. You are also effectively making larger repayments because you only withdraw the money you need to live on each month, leaving all surplus cash in the loan account to reduce the balance. In this way, the loan can be paid off much quicker and thousands in interest saved. Line-of-credit borrowers must be disciplined, however, and not withdraw more money over time than is going in. Income you bank must exceed your total expenses by at least the value of your principal-and-interest loan repayment before there is any financial benefit.

26. Use your home equity to borrow

The more you pay off your home loan, the more of the property you own or the more 'equity' in the property you build up. With a more flexible planning system these days, it is possible to borrow against this equity for further investment; a second property, shares etc. The advantage of borrowing against this equity rather than taking out a personal, investment or business loan is that the interest rate will invariably be lower – the better the asset you put up as collateral, the better the terms a lender will offer. Nothing beats bricks and mortar security (in this case, your home).

27. Win rate discounts for bulk business

It's possible to get home loans with interest rates discounted by up to half a percentage point lower than the standard variable rate. The big banks and some smaller lenders offer a package of discounts and bonuses to those who conduct all their planning with them. These packages require a minimum loan of $150,000 -$250,00, using the lender's credit card, opening a transaction account, and having an above-average income. An annual fee for the package may apply. Borrowers can save nearly $19,000 in interest on a $200,000 loan over 25 years if the rate is cut from 7.07 per cent to 6.57 per cent. This will reduce monthly repayments by $63 and borrowers can save more than $25,000 in interest if the monthly $63 saving gets put towards the loan at the lower interest rate. The package may also include fee-free planning and discounts on products such as margin loans, insurance and personal loans. The packages are generally not promoted actively: the customer has to seek them out.

Personal/ car loan tips

1. Avoid unsecured loans if possible

Avoid using unsecured personal loans if you can put up some security for your borrowings. This will get you a lower interest rate. A home equity loan, or redraw of extra repayments, allowing you to borrow against the equity built up in your own home or an investment property, is the best option of all, and could get you finance at up to 5 percent less than a car loan.

2. Be clear about leasing

Leasing is really just another form of borrowing to finance a car. But unlike loan finance - where you take ownership of the car and offer it or something else as security to the lender – lease finance sees a leasing company take ownership and give you the use of the car under contract for a specified period.

3. Be honest in loan applications

Be honest about why you want the loan. Your bank may be able to offer you a loan option that better suits your circumstances. There are an increasing variety of different types of personal credit these days; car loans, commercial loans, leases, home equity loans, are just some of the examples.

4. Can't get a standard loan? There are alternatives

If the banks, building societies and credit unions won't lend to you because you're self employed, newly arrived in the country or have a poor credit history, consider the booming non-conforming and "low doc" loan market. A number of non-bank lenders offer loans which especially cater for this type of borrower. The interest rates on non-conforming loans are generally higher but come down after a few years of on-time repayments.

5. Check your statements for errors

There are claims that more than 50 percent of home loan statements contain calculation errors. Simple mistakes, like the entry of the incorrect balance or the application of the wrong interest rate at the wrong time can be costly and mostly favour the lender. We all make mistakes, even bank computers make them and that's why borrowers should keep a close eye on loan statements. Various software for your home PC is available that can run a check on your statements.

6. Consider smaller lenders too

When shopping around for a car loan, consider community banks, credit unions and other smaller financial institutions which might be more approachable, and offer lower interest too.

7. Do you have to take out a personal loan at all

Think twice before borrowing money without security. You may have a better option already available; home equity extension to your home loan, a new loan that uses your property as security, a credit card, or even a rich relative.

8. Do you qualify for a 'relationship discount'?

Relationship discounts are available from banks and credit unions for those borrowers who consolidate a range of banking business with the one institution. Home and personal loan interest rate discounts, term deposit bonuses, savings account fee waivers and credit card annual fee waivers are commonly offered.

9. Don't just take the dealer finance

Don’t accept loan or lease finance offered by a car dealer before comparing the offer with finance options offered by your bank or other credit providers. Dealer finance might be less hassle but you could well end up with an expensive loan and more restrictive terms and conditions. The same goes when buying furniture or any consumer goods where finance terms are offered.

10. Don't make multiple applications

Don’t fill out applications at several financial institutions and have all of them checking into your credit history. This can make you look desperate and lower your credit score.

11. Don't rely solely on comparison rates

All lenders must now include "comparison rates" in advertisements for their home loans and personal loans to help consumers get a feel for their total cost - fees and the interest. Don't rely solely on comparison rates when choosing a loan and beware of their shortcomings. They only take into account fees and interest rates, not the features and how suitable the loan is for your circumstances.

12. Have the right information

when applyingWhat you will be required to supply in any application for lease finance will depend on whether the lease is for personal or business use.

Personal lease applications will require:

• proof of current employment


• income details or tax returns

Business lease financing requires more detailed information and may include your:

• balance sheet


• tax returns


• cash flow projections


• business plan

Confirm with the lender what you will need before the interview.

13. Have you considered a credit card?

Consider also a credit card as your source of credit. Interest rates are generally higher but credit cards are easier to secure and offer greater flexibility of repayments.
Check out BankChoice's credit card selector to compare cards that suit your needs.

14. Honesty counts Be honest about why you want the loan.

Your bank may be able to offer you a loan option that better suits your circumstances. There are an increasing variety of different types of personal credit these days; car loans, commercial loans, leases, home equity loans, are just some of the examples.

15. Keep accurate records

Keep accurate records of your deposits and ATM transactions. It is also wise to keep copies of your loan application and approval documents in a safe place.

This is the best way to avoid hefty fees which may be charged by a bank when its customers want to see copies of their cheques or loan files.

16. Know what interest rate applies

When offered car finance, either lease or loan, always be sure you know what interest rate applies. Lenders often ‘sell’ you their finance packages by quoting the monthly repayments only. This may disguise a high interest rate.

17. Look beyond the banks

Get a feel for what's on offer across the wide range of financial providers around these days. Credit unions, building societies, mortgage originators, community banks and boutique online or telephone banks may offer better interest rates or lower fees than the big banks because they are anxious to win new business or they are non-profit organisations.

18. Try lenders with whom you are a regular customer

Take advantage of the human factor. Being a familiar face may earn you some slack if your credit background is smudged.

19. Understand what's on offer

Is the interest rate fixed or variable? What up-front, annual or ongoing fees are charged? Check out BankChoice's loan selector to compare loan fees and rates.

What A Wreck: Recovering from Bad Credit

Try as we might, there are situations when our financial circumstances goes south and our credit ratings go down the drain. Here is an article on how a home-based working mom handled her family's less-than-stellar credit ratings.

By Tammy Harrison

I have seen the advertisements and cringe - "Let us fix your damaged credit", "Don't file bankruptcy, let us help". I am sure you have not only seen them but if you have been in financial trouble you have probably thought about calling a credit counseling service for assistance.

You might as well wreck your car and collect the proceeds to repair your own credit while recuperating.

My husband's financial situation was bleak, to say the least, when we met. He had previously been married and followed the letter of the law as laid out in his divorce decree. Unfortunately, his legal representation failed to explain that in order for his name to be removed from an automobile loan his ex-wife was awarded, that she needed to either refinance the car or she had to file a "Release of Lien" and obtain approval from it with their lender. She did neither and she failed to pay for the car. Yup, it was repossessed and he was held responsible for the loan since they could not locate her.

The same thing happened with their income taxes. She was supposed to pay her portion and five years after the divorce they located him and not only delivered a bill to him but audited him (this was prior to the newer and nicer IRS).

He was in college, getting his Ph.D. and his income was very limited. He was able to pay his truck loan and his living expenses but there was little left over for anything else.

I had just graduated from college with my high and mighty B.S. in Consumer Economics and thought I had the answer for him. I had taken a class whereby various executives from our community came in and explained their jobs and what the career possibilities were for our new educated lives. One of the ladies who spoke was from the local non-profit credit counseling agency and I had retained all of the literature she had shared with us.

My husband really wanted the situation remedied and was willing to do what was necessary to fix what was broken - instead of walking away from it through bankruptcy. He made an appointment and after we spent a whole week filling out the paperwork, they agreed to work with him to get him on the right track.

They made agreements with credit card agencies to stop the accruing interest as long as he paid the principal balance and we sent them a check every month to cover all loans and credit card payments. They disbursed the money and sent us a receipt so that we knew how much was paid to whom and the remaining balance.

Our goal was to get everything cleared up within seven years. Fortunately we were smart enough to know that if we had extra funds, we sent extra money and asked them to forward it to whichever account we thought was best. We were able to pay everything off in four years - quite an accomplishment!

Then the bomb hit. We were sent a final copy of all payoffs along with a whole packet of information from the businesses in the town that we lived in showing us who would lend money to one of their 'graduates'. What? We thought we were taking care of everything so that we would not have trouble in the future with credit.

Wrong, wreck the car.

The information from the credit counseling service was dutifully reported to the credit reporting agencies and reality hit. If we had filed for bankruptcy, his credit report would have been wiped clean after seven years. There are also a number of places that are more than happy to loan people money after they file for bankruptcy because they are devoid of bills. As it was, we spent four years being socially conscious citizens and paying back debts and another seven years waiting for everything to disappear from his credit report.

I do not recommend wrecking the car and having the insurance company finance the bad choices you made in your financial life and I do not recommend filing bankruptcy, for the same reasons. What I do recommend is if you have financial trouble, you get ALL information available to help you make an informed decision. This includes not only how to stop the harassing bill collectors from calling you but also where you will stand when you have paid your debts and have to live with the results.

About the Author:
ฉ2000 Tammy Harrison. Tammy Harrison is a wife and mother of three children ages five and under and a home-based working mom. She has a degree from Mizzou in Consumer Economics. She is the Independent Creative Representative for Home-Based Working Moms http://www.hbwm.com/

When Not to Seek Loan Financing for Your Business

Loans are an important source of start-up funding for small and home-based businesses. However, obtaining loans from banks, government programs and other financial institutions is not always easy. Sometimes, the process feels like going through a needle, more so if you have the following characteristics

by Lyve Alexis Pleshette

Loans are an important source of start-up funding for small and home-based businesses. However, obtaining loans from banks, government programs and other financial institutions is not always easy. Sometimes, the process feels like going through a needle, more so if you have the following characteristics:

1. You have poor personal credit history.

Poor credit could make it difficult or temporarily impossible to achieve your dream of getting bank financing for your startup business. Banks and other lending providers look for good personal credit history when reviewing business loans. In fact, it is one of the first things that a bank looks into when reviewing loan applications.

Alas, a poor credit history cannot be repaired overnight. In the United States, a poor credit history can haunt you for seven years -- and for 10 years in the case of tax liens and Chapter 7 and 11 bankruptcies. If your credit history is less than perfect, it may be worth a shot to include a note in your loan application explaining what you’ve done to rectify some of the black marks in your credit history.

2. You do not have your own money in your business.

You go to a bank hoping to get the money needed to jumpstart your business only to find out that they require that you have some money yourself in the first place!

The reality is that banks will hardly give you 100% of the capital you need. They want to see you invest in your own business. Your owner's equity shows them that you believe that the business will actually make money to the point where you are willing to put your own money at risk. Many banks require 30 percent owner’s equity, while some micro loan programs may require a lower 10 percent.

If you are seeking a start-up loan for $100,000 and your bank requires 20 percent owner’s equity, then you need to put up $20,000 of your own money in the business with the bank giving you $80,000. These numbers represent a debt-to-equity ratio of 1:4.

3. You cannot prove that you can repay the loan.

Banks will not give you a loan because they are magnanimous and charitable. They are in it to make money! And they can only make money if you pay them back. Your loan application will only be successful if you are able to convince the bank of your ability to repay the loan.

For an existing business, you need to prove that your business is profitable. A start-up business, however, has no previous financial statements to prove its ability to earn profits. Instead, you need to provide the bank with research on revenues and expenses of comparable businesses in your industry.

Note that there are some industries that banks may consider as too risky to finance. Some of them include home-based businesses, nightclub businesses, and others. Be sure to check out if your bank is averse to giving loans to particular industries. If your business falls on that particular industry, you may need more research or other evidence of your capability to repay the loan to convince the bank to lend you money.

4. You do not have collateral.

Collateral provide banks with the assurance that they can get their money (or at least parts of it) back, even if you cannot pay. In fact, even micro loan programs require some form of collateral to secure a loan. Your collateral can take the form of personal and business assets -- house, receivables, stocks and bonds, furniture and fixtures, among others -- that can be sold to pay back the loan. If you do not have collateral, you will need to have a co-signer who has collateral and can pledge to cover your loan in case you default on payment.

5. You have not paid your income taxes.

If you are looking to get a loan from a government-sponsored program or entity such as the Small Business Administration (SBA), you need to play nice with Uncle Sam first. As part of the loan approval process, the loan provider first obtains a tax verification certification from the Internal Revenue Service (IRS) to check if you are paying your taxes. If the IRS gives the loan provider a negative report on your tax paying habits, then your loan will not be approved.

6. You do not have experience in running the business.

If you are a greenhorn who has no experience in starting and running a business, no knowledge or experience of the industry you plan to get into, chances are slim that you are going to get the loan. Banks look for assurance that you know what you are doing and that you can actually run the business.

If you are in this situation, you must first try to get some knowledge and experience in running a business, particularly in your target industry. Attend some entrepreneurial training classes. Get a job in your industry to see how it really works. Or better yet, get people who have knowledge and experience on your board to show the bank that you have experienced minds guiding you in this business.

Government Loan to Start a Small Business

Q. I don't have very good credit. What are my chances of getting a Small business loan? Also, the SBA does not do loans under $250,000. Who is my second best choice? - Jessica

Advice by Nach Maravilla

Publisher, PowerHomeBiz.com

A. Dear Jessica,

It is really unfortunate that many talented individuals with bright and workable business ideas are constrained in getting resources to finance their business due to "less than perfect credit."

In our experience, any kind of "not so good, not very good" remark on your credit report is just plain "No Good" to any financial institution and any attempt to apply for any kind of loan would just be a futile attempt.

To help you assess your credit standing, you may want to get hold of your credit score. Previously kept secret by lending and credit institutions, credit bureaus and other organizations are now offering them to the public. Equifax is offering FICO scores to consumers for a fee. Eloan.com https://www.eloan.com/myeloan/viewscore?linksrc=score is offering this service free of charge. Plus, their free report comes with an analysis of your credit worthiness based on a number of factors, such as payment timeliness, number of accounts opened, etc. The report also comes with recommendations on how you can improve your credit score. Best of all, this resource is free.

Even if you have a very good credit, you will have to present a viable business plan when seeking out a business loan, whether from the bank or SBA. The business plan must show the feasibility of your proposed business to convince the "institution" to risk their money with you or your organization. For a guide in preparing business plans, you can visit our Starting a Business section at http://www.powerhomebiz.com/Index/feature.htm

However, there is such thing as a business loan with a collateral. This kind of loan is easier to acquire because the loan is secured. If you have some properties titled under your name, you may try and inquire from any bank nearest you.

If you have equity in your home, you can also use a "Second Mortgage" financing and use the money for your new business. Normally, second mortgages are intended for home remodeling, etc for your home, but they usually don't bother checking whether you really used the money for home-improvement. Their main concern is that you pay the money back.

This may not be a good option, however because second mortgage financing normally are high interest loans and the pay back amount is almost over 200% than the original loan. Imagine paying back $75,000 for a $25,000 loan in the span of thirty years.

Another option is to check out your family, relatives, friends to become incorporators or partners in your planned enterprise. Present your idea to them and show them how you foresee the business to operate. Show them your business plan. Perhaps, some of them will be willing to put up some kind of investment money for you. And if you have considered the initial amount you will need, ask them to invest specific pro-rated amounts.

Of course, you have to make sure that your business will really work out successfully. Otherwise, you might run into lawsuits and ultimately lose your friends and maybe your relatives.

We have articles in the website that may also give you some insights. http://www.powerhomebiz.com/vol21/bankloan.htm http://www.powerhomebiz.com/Index/financing.htm

There are books that you can also check that provides information on getting grants and free government money for businesses. One book you may want to read is "Free Money from the Federal Government for Small Businesses and Entrepreneurs."

Visit your public library and borrow this book, as well as several other books in the same topic. or buy the book from Amazon.com at http://www.amazon.com/exec/obidos/ASIN/0471130095/powerhomebizguid

Another resource you may want to check out is the Catalog of Federal Domestic Assistance (CFDA) at 6 , which lists all grants that the government gives. You may find a grant that you may qualify.
Good luck!

How to Get an SBA Loan

The SBA is an important source of business loans for American entrepreneurs. Know the general criteria set by the SBA for its small business borrowers.

by Lyve Alexis Pleshette

An important source of financing for U.S.-based entrepreneurs is the Small Business Administration (SBA). The SBA provides short- and long-term loans to eligible, credit-worthy start-ups and existing small businesses that cannot obtain financing on reasonable terms through normal lending channels.

Note, however, that SBA does not provide direct loans. Rather, the agency provides guarantees to loans availed through SBA's partner lending institutions, which includes many community banks. The applicant must satisfy the lender's requirements before he or she can ask for a guaranty from the SBA, unless the borrower is deemed prequalified based on the person's character, credit, reliability and experience (prequalification is for loans $250,000 or less).

SBA provides a number of loan programs for most business purchases, including purchasing real estate, machineries and equipment, inventory, or working capital. Some loans focus on assisting businesses affected by specific economic conditions, such as those affected by defense cuts, and those at risk due to changed trade patterns with Canada and Mexico. There are also a number of loans for small businesses engaging in export and international trade, while some loans are geared for environmental concerns.
To avail of SBA loans, the borrower must meet these criteria:

1. The borrower must have a stake in the business.

The SBA wants to see those applying for credit to have invested in their own business. In SBA's view, business owners who have put their own money into the venture are much more likely to push hard for the success of their business. Depending on the loan program applied for, SBA requires the borrower to have invested between 25 to 50 percent of the amount requested. The SBA will not underญwrite 100% of the venture. Hence, a borrower seeking a $100,000 loan should have already invested about $25,000 to $50,000 in the business.

2. A strong business plan.

Like banks and other financial institutions, SBA requires the submission of a business plan. Through the plan, the SBA wants to see that the entrepreneur possesses a clear understanding of the business they're in, have taken steps to research the market, and studied the prospects of the business. The SBA wants to see detailed plans on how the business can make money. More importantly, they want to know how the entrepreneur can repay the loan and whether the business can earn enough to at least cover the monthly payments.

3. A good personal credit rating.

The credit history serves as a person's gauge for credit worthiness. The borrower's track record in paying their bills will form an important component in the loan application process. The SBA partner banks, which provide the money, usually conducts a credit examination of the borrower then submits the results to SBA. Since SBA requires that the borrower personally guarantee the loan, he or she must show a history of honoring and repaying debts on time. Bankruptcies and poor credit history may lead to difficulty in availing SBA loans.

How to Raise Money to Start a Business

One key to a successful business start-up and expansion is your ability to obtain and secure appropriate financing. Raising capital is the most basic of all business activities. Remember, it takes money to make more money.

by Isabel M. Isidro

One key to a successful business start-up and expansion is your ability to obtain and secure appropriate financing. Raising capital is the most basic of all business activities. Remember, it takes money to make more money.

Flip open trade publications and business newspapers, and you will be bombarded by reports of abundance of available capital for entrepreneurial start-ups, particularly for the dot.coms. The financial news would have you believe that more money is available for new business ventures than there are good business ideas.

However, while venture capital may be overflowing for the Internet start-ups, the real scenario for small businesses (and worse, home-based businesses) is far different. Capital is hard to come-by, especially if: (a) you do not have a good business idea or business plan that will make rich backers run to you in the hope of multiplying their savings exponentially; and (b) you may have a good business idea, but you do not know anyone who matters. The problem is that most beginning "business builders” doesn’t know what to believe or which way to turn for help.

Then again, business means risk, and success comes to those who focus on their goals and actually do something. Who knows, you may be lucky and dispel stories of “tight money.” You first step should be to start making phone calls -- talking to people, and making appointments to discuss your plans with the people who have money to invest. When you're looking for money, it's essential that you get the word out to as many potential investors as possible.

There are several sources to consider when looking for financing. Don't make the mistake of thinking that the only place you can find the money you need is through the bank or finance company. Explore all of your options before making a decision. These include –

Personal Savings.

The first place to look for financing is right at home and personal savings and assets are the easiest source of capital. If you have money set aside, you use it instead of borrowing or rounding up investors. Or, you can take an inventory of items you do not need and have a garage sale. Most people are pleasantly surprised how much cash they can raise in a single weekend. You can also use your stocks, bonds, pension plans, life insurance policies and real estate to raise the needed capital. Those who own homes oftentimes secure equity loans and use the proceeds to start a business.

However, most beginning entrepreneurs don’t have adequate personal savings to fund a business start-up. Others, on the other hand, have savings but refuse to dip into their piggy bank for a variety of reasons. It may be their retirement money or for emergencies; while others would rather use their savings as collateral and borrow against it at a low interest rate.

Family Members and Friends.

Next, turn to members of your family or close friends who have faith in you and want to see you succeed. Borrowing from a friend or relative is generally the most readily available source, especially when the capital requirement is smaller. Relatives and people you know need fewer assurances and are more open to your ideas than professional investors. They are also more patient if your business takes longer than expected to get off the ground. Offer to repay them through profit sharing.

If you are borrowing from family members instead of asking them to invest, maintain a very businesslike and impersonal procedure. To avoid putting strain on the relationship, it is better to draw up a formal agreement in order to put the terms of the loan in writing. It is important to view the participants as business associates.

Venture Capitalists.

Venture capitalists are professional investors who may be in charge of a large pool of capital gathered from a range of sources. These firms invest in new, even high-risk or speculative businesses without a proven track record, with the potential for rapid growth and high returns in a short time. They generally want equity or part ownership of a business in exchange for substantial returns (25 to 40 percent or more) when they exit typically in three to seven years. Particularly in the Internet sector, several venture capital firms have achieved capital gains of 300 to 500 percent, which are used to offset by a wide margin any losing ventures. These firms are mostly interested in potential projects that require $500,000 or more because of the high cost of investigation, evaluation and administration. While a venture capital firm may receive as many as 1,000 business proposals a year, it will typically investigate less than 10 percent and may actually invest in only 3 or 4 percent.

Angel Investors.

Angels are private investors interested in making more on their capital than they can make through traditional markets such as mutual funds or publicly traded stocks. These “angels” can be your accountant, attorney, doctors or other individuals who seek out new businesses to invest in return for equity ownership. Usually providing additional capital in the range of $25,000 to $500,000, expect angel investors to demand high returns for their investments. Relative to venture capitalists, though, angel investors are less demanding and can also be expected to provide expert guidance and mentor the start-up.

As you explain your plan to them, and ask for their advice, casually ask them if they'd mind letting you know of, or steer your way any potential investor they might happen to meet. Do the same with your banker. Give him a copy of your prospectus and ask him if he'd look it over and offer any suggestion for improving it, and of course, let you know of any potential investors. In either case, it's always a good idea to let them know you're willing to pay a "finder 's fee" if you can be directed to the right investor.

Professional people such as doctors and dentists are known to have a tendency to join occupational investment groups. The next time you talk with your doctor or dentist, give him a prospectus and explain your plan. He may want to invest on his own or perhaps set up an appointment for you to talk with the manager of his investment group
Note, however, that most angels and venture capitalists do not invest in home businesses.

Banks.

Banks can be your least expensive route to raising capital, as you can get loans that are just about 2 percent above prime. However, you would need assets or profitable and clean credit histories to avail of bank loans. In addition, some banks may require established businesses to provide one third of the equity injection and start-ups up to 50 percent or more. You will also need to have a business plan with adequate documentation demonstrating a projected cash flow that will enable you to repay (on time) the loan with interest. You can, in most

instances, borrow small amounts of money from local banks for periods of up to three years. An unsecured loan requires only your signature, but more than likely a secured note will be offered to you. This has lower interest payments than an unsecured note, but will require you to pledge some assets, such as stock, or to have someone guarantee the loan. The bank can also provide you with a credit line, which is a revolving bank account secured against your inventory or accounts receivable that allows you to draw funds against a given total established by your bank.

Industrial Banks.

Industrial banks are usually much more amenable to making business loans than regular banks, so be sure to check out these institutions in your area. Insurance companies are prime sources of long-term business capital, but each company varies its policies regarding the type of business it will consider. Check your local agent for the name and directors of another company to invest in your business. Look for a company that can benefit from your product or service. Also, be sure to check at you public library for available foundation grants. These can bet he final answer to all your needs if your business is perceived to the related to the objectives and activities of the foundation.

Advertising

As simple as it seems, one of the easiest ways of raising money is by advertising in a newspaper of a national publication featuring such ads. Your ad should state the amount of money you want-always for more money than you need so you have room for negotiating. Your ad should also state the type of business involved (to separate the curious from the truly interested), and the kind of return you are promising on the investment. On the Internet, several web sites offer match-up services for investors and capital seekers. Garage.com, for example, assists entrepreneurs in the high technology sector in securing seed-level financing by presenting their business requirements to a pool of high quality investors.

Credit Cards

Some entrepreneurs use several credit cards to provide a substantial cash bankroll for the business start-up. In fact, credit cards are used by nearly one-third of start-ups. It is relatively easy to obtain, and eases the bookkeeping systems. However, using credit cards to launch a business is the least wise, since credit card money is the most expensive money that you can borrow. If you intend to carry a balance, the annual interest charges (12 to 21 percent) are quite steep. While credit card advances is one of the most commonly used sources for start-up financing, it is dangerously close to gambling.

Small Business Investment Companies

Don't overlook the possibilities of the Small Business Investment Companies in your area. Look them up in your telephone book under "Investment Services." These companies exist for the sole purpose of lending money to businesses that they feel have a good chance of making money. In many instances, they trade their help for a small interest in your company.

Business Development Commissions

Many states have Business Development Commissions whose goal is to assist in the establishment and growth of new businesses. Not only do they offer favorable taxes and businesses expertise, most also offer money or facilities to help a new business get started. Your Chamber of Commerce is the place to check for further information on this idea.

Life Insurance

Another frequently overlooked source of start-up funds is borrowing from life insurance. Loans are almost always obtainable against policies with savings features.

Money Broker or Finder

These people take your prospectus and circulate it with various known lenders or investors. They always require an up-front or retainer fee, and there is no way they can guarantee to get you the loan or the money you want. There are many very good money brokers, and there are some that are not so good. They all take a percentage of the gross amount that's finally procured for your needs. The important thing is to check them out fully; find out about the successful loans or investment plans they've arranged, and what kind of investor contacts they have all of this before you put up any front money or pay any retainer fees.

Start thinking about the idea of inviting investors to share in your business as silent partners. Think about the idea of obtaining financing for a primary business by arranging financing for another business that will support the start-up, establishment and development of the primary business. Consider the feasibility of merging with a company that's already organized, and with facilities that are compatible or related to your needs. Give some thought to the possibilities of getting the people supplying your production equipment to co-sign the loan you need for start-up capital. This is truly the age of creative financing.

The truth is this: Now is the time to make your move. Now is the time to act. The person with a truly viable business plan, and determination to succeed will make use of every possible idea that can be imagined. And the ideas I've suggested here should serve as just a few of the unlimited sources of monetary help available and waiting for you!

Investment dollars are not out of the question for a home business, but it isn’t a likely situation unless your business has the potential to gain significant stock value. This also means that your company will need to be larger than just an extension of yourself. To attract investors, you will have to make the case that the business could be sold at some point to another person or company that could pick up where you left off and continue to grow the business. If this is the case with your enterprise, you might consider going through the pain to gain investors, but be prepared to learn how the system works before you send off proposals.

=====For a step-by-step guide to starting a business, order the CD-Rom "Power Home Business Ideas" from PowerHomeBiz.com at http://www.powerhomebiz.com/Index/practicalbizideas.htm

The Six C's of Credit

Thinking of applying for a loan to augment your start-up capital? Know the criteria that loan officers use when they review loan requests.

by Isabel M. Isidro

When it comes to loans, bankers are looking for answers to a series of questions that fall under five categories: character, capital, capacity, collateral and guarantees, and conditions. The various ingredients that are included in a thorough request will address these questions.

Character. The first thing that loan officers look for when reviewing a proposal is evidence of your trustworthiness. Your loan application can be rejected without even reviewing your proposed business idea if loan officers find any evidence in your background indicating lack of integrity. They would ask questions like: "Who are you? How long have you lived where you live? How long have you been in business? Do you live up to your obligations? What is your standing in the community? The answers to these questions will normally come from your business plan and references.

In addition, banks will rely heavily on your credit history. They would want to know if you have always repaid your obligations. If there are noticeable blemishes in your financial, professional or personal background, your chances of getting a loan is significantly reduced. So expect questions like, "What do your suppliers say about you? What about your personal credit history? How will your credit history reflect on your credit future?"

Capability to Manage the Business. Banks need to be sure that the person/people making the business decisions know what they are doing. Mismanagement is the foremost reason for the failure of new businesses, and banks naturally would want to avoid that. Loan officers would want to know the professional background, previous business experience, relevant education, and level of success of the business owner. If you have limited experience, you will have more chances in getting a loan if you are a franchisee of an established business, or if you bring in someone with more solid experience.

Capacity. If the bank feels that confident about your personal background and your ability to make good judgments when making business decisions, the next step for them is to determine the capability of your business to turn up a profit. They will now ask: "What is your ability to repay the loan? How are the loan proceeds to be used? How will they be repaid?" Banks are particularly interested in: (a) how soon you can generate a positive cash flow; (b) when you will show a profit; (c) how large will it be; (d) whether your profit will be lasting; and (e) whether various assets will be financed via debt or equity. The answers to these questions come from a review of your financial statements, particularly your cash flow statements, profit and loss statements, and personal and corporate tax returns.

Collateral and Guarantees. Your collateral is important, but banks put more premium on the potential profitability of your business proposal. Your collateral represents an "escape hatch" for your bank, and banks normally want it to be large enough to be able to cover their losses (if at all) and easily convertible to cash. From your projected cash flow and list of assets, bankers will ask "How can you be sure of your ability to repay the loan? What can you offer the bank as an alternative source of repayment? In most instances, the bank will require the personal guarantees of all principals. Besides providing another source of repayment, it also shows your commitment to the business.

Context of the Business. No business exists in a vacuum, and loan officers would look at a number of factors that may potentially impact on your kind of business. They would pay particular attention to potential economic, legal, employee, supplier, or environmental problems. Expect questions like," What is the state of the economy? Are there environmental issues to be concerned about? How could these affect the financial condition of your business?" Loan officers tend to consider loan applications more favorably if: (a) you are introducing a new product or service with an obvious demand; (b) there is little competition; (c) your market is composed of small independent businesses; and (d) lower rate of failure in your type of business.

Conditions or Terms of Loans. The nature of your loan request is another important factor that could affect the results of your application. Banks would want to know three important things: "How much money are you requesting? What will it be used for? and For how long will it be needed?" Banks oftentimes prefer to approve loans for items that can be identified, has lasting value, and can be repossessed and sold if things fail.

About the Author:
Isabel Isidro for Power Homebiz Guides. For a step-by-step guide to starting a business, order the CD-Rom "Power Home Business Ideas" from PowerHomeBiz.com at http://www.powerhomebiz.com/Index/powercd.htm

Thinking of Getting a Bank Loan? Do Your Homework First!

If you are a start-up entrepreneur, getting a bank loan is like going through the needle. It is tough, but not totally impossible. You just need to do your homework well. Here are the kinds of preparation you need to do to increase the chances of getting that bank loan approved.

By George Rodriguez

Power Homebiz Guides Staff Writer

Borrowing to start a business is not easy. Getting a bank loan, particularly for a start-up business and a newbie entrepreneur, is like going through the needle. More so if your business is home-based and on the Internet.

Banks favor an established businessperson with a solid credit rating, a sizeable bank account, experience in the business they propose to enter, and business plans that show the ability to repay the loans. If you are not one, then you need to double your preparations to convince the banker to lend you that much needed start-up capital. If your business is a start-up, bankers will need to know as much as possible about you and your business. Lenders will ask for an awful lot of questions, and it takes a great deal of work to put it all together.

However, many small business owners often make the mistake of not being adequately prepared when going to the bank to the loan. Surprisingly, many loan applicants don't even have the slightest idea how or when they intend to repay the money they requested. Often they don't even know how much money they need. When asked how much money they want to borrow, many people give these two common responses: "How much money can I get?" and "As much as possible." Is it any wonder that lenders say no?

The bottom line is that it pays to do your homework before you ask for a loan. Bear in mind that the probability of getting your loan approved goes up if the degree of risk associated with lending you money goes down. To lower your risk and improve your odds of getting the loan, you need to anticipate the question lenders will ask you. You need to present your banker insights into your business that may enable him or her to easily approve your loan. For example, prior to filling out a loan application, you should know:

1. Exactly how much money you need?

Be as exact as possible, adding a little for contingencies and the unforeseen extra expenses.

2. How you plan to use the money?

Telling the banker that you want a loan to "have working capital" to the fastest way for your loan to be denied. There are only three things you can do with a loan - to buy new assets, pay off old debts, or to pay for operating expenses. Be specific as possible.

3. How long it will take you to repay the loan?

Your cash flow projections will help you formulate a repayment time frame for the loan. This is the time when you need to convince the banker of the good potential of your business and its long-term profitability.

4. What rate of interest rate can you afford?

There is no sense in tying yourself up in a loan that will squeeze out your profits and bleed your business dry. It does not benefit you to take on debt that cannot be repaid.

5. What can you use as security for the loan? A loan is a risk, and the bank needs to make sure that they can get their money back. You need to present your personal guarantee to repay the loan and collateral. Your goal is to convince the banker of the value of your collateral.

Of course, don't forget to present that all-important written business plan explaining in detail your business objectives, projected earnings for the next one to three years, marketing strategy, and other relevant information. Be sure your marketing strategies are outlined in detail to lend credence to your sales projections.

In addition to your business plan, you need to support your loan application with numbers - preferably good ones. Part of that homework is to gather the financial data that will enable you to prove to lenders that you are a good credit risk. In short, this entails putting together a credit history that includes the following:

• Personal financial statement listing your assets and liabilities


• A list of all credit cards and their current balances


• All outstanding loans, including original balances, amounts outstanding, and current monthly payments


• Total monthly mortgage or rent payments


• Net monthly income from your home-based business, an outside job or other sources


• Checking and savings account balances


• The value of your automobile(s), including original cost, balance owed, and current monthly payments


• The current value of all property, including real estate, stocks and bonds

Getting a loan is going through a hard road. Bankers need to be sure that they are not taking inordinate risks with you. Your role as the loan applicant is to convince the bankers that you and your business are good credit risks.

About the Author:
George Rodriguez is a staff writer of Power Homebiz Guides. For a step-by-step guide to starting a business, order the CD-Rom or Download "Power Home Business Ideas" from PowerHomeBiz.com at http://www.powerhomebiz.com/Index/practicalbizideas.htm

Twelve Tips for Getting Your Bank Loan Approved

Securing a bank loan to finance your small business is getting to be more difficult. Here are twelve basic steps you must take before going to the bank for a business loan.
By Isabel M Isidro

Finding the money needed to start a new business is almost always one of the most difficult obstacles new owners face. The most likely (and easiest) sources of capital are your families, friends and own savings. However, you should not overlook institutional sources as well.

Without a previous track record in business, securing a bank loan may be difficult. Banks cite risk factors and increasing costs of servicing small accounts as the primary reasons for minimizing their exposure to small businesses. Still, it can be done. Here are the steps that you should take to improve your chances of getting that much-needed bank loan:

1. Keep in mind that to stay in business banks need to make loans.

Do not be afraid to ask for one. That is what the loan officer wants you to do. To increase your chances of getting a loan, look for a bank that is familiar with your industry and who has done business with companies like yours. Seek out banks that are active in small business financing. Some banks lend on a conventional basis (lending money without government support), while some banks participate in government programs (in the form of government participations involving direct government funds or loan guarantees). However, be aware that banks often demand stiff collateral requirements for start-ups.

2. As an entrepreneur, make sure that you are thoroughly prepared when you go to your banker's office to request a loan.

You need to show your bankers that a loan to you is a low-risk proposition. Have on hand a completed loan application, copies of cash flow and financial statement projections covering at least three years, and your cover letter.

3. Learn to anticipate every question that he or she has.

Remember, the combination of information and preparation is the most powerful negotiating tool in the world. A confident and thoroughly prepared borrower is four times more likely to have his or her loan approved than a borrower who does not know the answer to some of the basic questions a banker asks. To show the extent of your preparedness, your business plan should also include answers to your banker's questions. These questions normally are:

• How much money do you need? Be as exact as possible; although adding a little extra for contingencies will not hurt.


• How long do you need it for? Be prepared to go into detail about what the money will do for you and why your business is a good risk.


• What are you going to do for it? Businesses use loans for three things: to buy new assets, pay off old debts, or pay for operating expenses.


• When and how you will repay for it? Your cash flow projections should provide a repayment time frame. Convince the banker of the long-term profitability of your business and your ability to repay the loan by using your financial projections and business plan.


• What will you do if you do not get the loan?

4. Do not take an apologetic and negative attitude.

Keep your negativity in check. Present yourself as an entrepreneur who can and will repay the loan. Boost your image by providing your loan officer with any promotional materials about your business, such as brochures, ads, articles, press releases, etc.

5. Dress in a professional manner for the interview.

This is a business transaction, so treat it as such.

6. Do not stretch the truth in your loan application.

Broad, unsubstantiated statements should be avoided. The lender can easily check many of the facts on your application. If you cannot support statements with solid data, then don't make them. Do your homework and spend time doing research to be able to support everything you say, including every single number in your projections. It is best to keep projections, assets lists and collateral statements on the conservative side.

7. Be sure all your documents are neat, legible and organized in a cohesive and attractive manner.

Type all your loan documents. Handwritten documents look unprofessional. Don't forget to include a cover letter.

8. Do not push the loan officer for a decision.

Doing so might result in a rejection. Your banker cannot make a decision until all your documentation is complete. To ensure a speedy decision, make sure that your application is complete.

9. Be confident.

An attitude of confidence enhances your chance of getting the loan. Show that you can make a success out of the money that the bank will lend to you. Visualize in your mind the positive results of your bank application.

10. Keep trying one lender after another until you get your loan.

To improve your position as you change bankers and banks, the best way is to ask for a referral from a successful entrepreneur. Before you decide to approach a bank directly, find an associate, friend or acquaintance that is in good standing with the bank to give you a good referral. Bankers tend to deal more favorably those who were referred to them by their best customers.

11. Failure to discuss risk in your application.

You must remember one thing: there is no business without risk. If you do not discuss risk, the bankers will assume that you haven't thought about risk. Let's face it - try as we might, we cannot plan for everything, for every contingency, for every turn of events. Bankers would want to know if you have planned for the major risks and how you intend to manage it.
Then, there is also the risk of too much success. The demand for your products or service may exceed well beyond your expectations, and they would want to know how you intend to handle success.

12. Remember that the first loan is usually the hardest to get.

Bankers prefer to lend money to borrowers who have borrowed at least once and have paid back at least one loan on time. They are not venture capitalists that make high-risk loans regardless of the profit prospects of your business. Bankers prefer to lend to low-risk, low profit ventures than to high risk businesses or those with no record of accomplishment.

About the Author:
Isabel M Isidro is the Managing Editor of Power Homebiz Guides. For a step-by-step guide to starting a business, order the CD-Rom "Power Home Business Ideas" from PowerHomeBiz.com at http://www.powerhomebiz.com/Index/powercd.htm