* Your Credit History. In this electronic age, lending sources can instantly evaluate how quickly and thoroughly you have paid your obligations to banks and other financial companies. Late payments, delinquent loans, bankruptcies, how much credit you have been extended by banks, credit card companies, department stores, and credit bureaus are all readily available to potential financial sources at the touch of a few computer keys.
* Your Character. Ultimately, the loan decision often comes down to a personal evaluation made by one or more loan officers. I’ve witnessed loans granted to entrepreneurs with bankruptcies in their past and loans denied to people with stellar credit histories because the loan officers’ sixth sense was triggered. This is so common that banks have a term for loans made to people without enough credit worthiness to sustain a loan. They’re called “character loans.”
* Your Collateral. Nothing makes a banker happier than collateral to back up a loan. Mortgages are collateralized by the houses they finance. Leases are collateralized by the equipment that is being leased. Having collateral is a way for a bank to be repaid if the loan is forfeited. Most lending sources require existing collateral such as an entrepreneur’s home, securities, or other assets, before they grant small business loans.
* Your Personal Guarantee. Lending sources want to make the entrepreneur generally liable for the loan, not just the business she’s starting. A personal guarantee provides this assurance without necessarily specifying the particular collateral. If you have few assets, a personal guarantee may not mean much, but if you have a home with significant equity value, or a large savings or investment account, giving the bank a personal guarantee will make the officers very happy, just as it should make you very nervous.
* Government Loan Guarantees. Federal agencies, such as the Small Business Administration, and various state programs help banks say yes to loans by essentially agreeing to guarantee repayment of some portion of the loan, ranging between 50% to 90%. While these government loan guarantees carry a paperwork burden for both entrepreneur and lender, they encourage lenders to feel more comfortable approving loans. The presence of a government guarantee rarely stops a lender from asking for – and usually receiving – other collateral or personal guarantees for the loan. This gives bankers more than 100% in collateral and guarantees and is rather like wearing both a belt and suspenders – unnecessary and unattractive, but it certainly keeps your pants up.
* Your Credit Scoring. Some credit research firms, most notably Fair, Isaac and Company, calculate a single figure into what they call a credit score for entrepreneurs. Factors such as your payment history, the amount of borrowing relative to your credit lines, recent inquiries by other financial institutions, and the types of credit you use, are put into a computer model that produces this single number, which is scored on a scale from a low of 400, representing poor credit, to a high of 900, representing strong credit.

The best loan for any banker is one in which the business generates enough money to comfortably make the interest payments and ultimately return the entire amount of the bank’s money. Government guarantees, personal guarantees, and collateral are just fall back positions in case the business fails and the entrepreneur defaults on the loan. Collecting from a guarantee or taking and selling collateral generate a huge amount of work and aggravation for the bank and invariably mark the end of its business relationship with the borrower. When a business performs as anticipated, meets its obligations, and even grows to the point that its credit needs increase, the bank, the loan officers, and the entrepreneur have a win-win situation on which they can build a long-term, mutually beneficial business relationship.

This long term, mutually-beneficial business relationship must start with financial projections the bankers find credible and then, throughout the relationship with the bank, prove to be credible. Of course, you want to have a strong credit score, show yourself to be of good character, and be able to offer as much in collateral or guarantees as are needed so the bank makes the loan, but, in the long run, financial performance and credibility are what truly matter.

Everyone has probably experienced a salesperson who tries to sell you what he wants you to buy rather than what you want to buy. This includes the shoe salesman who says to his customer, “We’re trying to clean out last year’s inventory, so if you buy one pair today, you get another pair free.” This presents the store’s goals, and doesn’t address the customer’s needs. The shoe salesman, however, who asks the customer what she is looking for, and listens to her goal, is uncovering the customer’s real issues and giving her a far more powerful incentive to buy. He can follow up this information by saying, “If you find the perfect pair of running shoes today, you might want to consider buying an extra pair, since we’re having a special two-for-one sale.”

The real issues include measurable goals, such as making a sale, projecting the return on an investment, restoring a patient to good health, or establishing a salary for a new staff position. The real issues may also be subjective and harder to measure, such as determining when your new venture will become profitable, how curable the patient’s disease might be, or how well a new employee will fit into your existing staff. The real issues are always substantive and they are always determined by the other person.

Focusing on the real issues moves the entrepreneurial conversation forward; any other subject stalls the conversation and reduces the chances of coming to an agreement to work together. Most people waste the opportunity to have an entrepreneurial conversation by not steering the discussion toward the other person’s real issues. They think about their own needs instead. Of course, your real issues are important as well, and you should be clear about what they are, but unless you focus on meeting the other person’s goals and objectives first, your own objectives will never be achieved.

A banker will not be interested in how rapidly your business will grow. She cares more about your ability to pay back your loan on time. In fact, she may worry that if you focus on growth, you will pour so much money into early expansion that your poor cash flow will prevent you from meeting your loan payments, which is her primary real issue. A scientist applying for a research position will not be that interested in touring the spectacular new administrative wing you recently added to your building. In fact, he might worry that more funds are being funneled into girders and windows than will wend their way into his laboratory, which is his real issue.

Let’s imagine two salespeople. Salesperson A strides into a meeting with every client by thinking to himself, “I’m going in there to make myself a sale and earn a commission.” Salesperson B says to herself, “I’m going to go in there and make myself a partner.”

If the client says, “I’m interested in your product to help reduce my manufacturing costs,” Salesperson A believes this is a buying signal and he tries to close the sale immediately by saying, “How about I write you up an order for a thousand of those to get you started?”

Salesperson B, however, doesn’t view this as a closing opportunity. She sees it as a chance to engage in an entrepreneurial conversation in which she can learn about the client’s manufacturing process and how they can work together for the long term. Salesperson B will be more able to build a partnership and find the best and longest lasting application for her products.

The difference in approach – and their ultimate success – comes from a clear focus on the real issues.

The most common home-based businesses include contractors, lawyers, accountants, sales, real estate, daycare, insurance, and farming². If you are considering a home-based business, there are many advantages which should be stressed in your business plan, including:

* Having low overhead costs that make the business more competitive.
* Being able to draw on the help of family members as needed.
* Saving time by not having to commute.

Potential disadvantages should also be addressed to reassure investors that you are aware of them and have strategies to minimize any problems they might cause:

* Having many distractions that could interfere with work.
* Not having space to hold business meetings.
* Needing to be a “self-starter” to deal with lack of office structure.
* Appearing small and less established to customers, suppliers, and partners.

There are a variety of strategies to deal with home-based business disadvantages. You can obtain access to conference space for meetings by reserving meeting rooms at local hotels or convention centers. Creating a Web site can make your business look as big as any competitor. Communication technology such as voicemail, pagers, call forwarding, and email can provide excellent service and make you appear as professional as even the largest competitor. Quality printed materials such as business cards, stationery, and brochures will make your business appear professional. Finally, establishing a separate, quiet, private work space that minimizes interruptions will be a must for a serious business endeavor.

1. Heck, R. K. Z., & Stafford, K. (2001). The vital institution of family business: Economic benefits hidden in plain sight. In G. K. McCann & N. Upton (Eds.), Destroying myths and creating value in family business (pp. 9-17). Deland, FL: Stetson University.

2. Paul and Sarah Edwards, Working from Home, 5th Edition, J.P. Tarcher, New York, 1999.

A 1996 study compared a sample of 118 businesses that employed two or more family members with a sample of 113 similar ventures that did not qualify as family businesses. Although this study was not as broad as the 1997 National Family Business survey, the results showed that the major goals for all businesses, whether family businesses or not, are making money, allowing the owners to live how and where they like, and making contributions to society by providing a valuable product or service.

The 1996 study also revealed that family business owners had a greater focus on using their businesses to achieve family goals, such as creating wealth for their family or building a business that their children can later run. They also reported having greater conflict between their businesses and families, but generally felt that they were able to manage these problems. Respondents revealed that their businesses benefitted from their family members’ involvement and that hiring non-family members would probably cost more.

In the final analysis, family-business owners feel that their businesses are better off for the contributions that their family members make. They also appreciate the opportunity to accomplish both family and business goals in the same entrepreneurial effort.