Newby - Question re financing a new small business

Discussion in 'Growing and Managing a Business' started by christiaan, Aug 1, 2012.

  1. christiaan

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    Aug 1, 2012
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    Hi.I am from South-Africa so I'll convert everything to US dollars for everyone's convenience.I'm just gonna jump straight ahead.I have $12 000 to my disposal.I'm starting a business and I know as future business owner I probably need to know these answers to my questions ,but I dont,and I believe somewhere out there someone is going to help me.

    I would like to buy a truck.I can find a decent secondhand truck for $10 000.That will leave me with $2000.Which isnt nearly enough for starting capital.

    Say I go to the bank,can I ask them for a loan of $10 000,pay the guy in full for the truck,then pay $3000 to the bank and pay the rest down on installments?And of course the truck will be an assett.With me having put down $3000 that means I will owe them $7000 plus interest.Now the truck will be more valuable than that so say worse case scenario I cant pay my installments,they cant loose any money if they reposes the the truck and sell it??

    (p.s. I virtually have no credit history).
  2. ArcSine

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    Jun 2, 2010
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    Instead of borrowing 10K and then immediately repaying 3K, the bank would prefer the simpler approach (with the same result) of your just borrowing 7,000 against the truck. You then give the 7K loan proceeds to the truck's seller, along with the 3,000 that you had originally planned on giving the bank up front. (Unless in your area, the method you've described is the preferred way to efficiently get the truck's title from the seller's hands into the bank's.)

    The lack of credit history will be problematic, but there are three possible factors that might help you overcome that...
    • If the truck's value significantly exceeds the 7K loan balance, that excess provides the bank with a bit of a safety cushion (as you've already noted in your post). Obviously, the larger the cushion, the more likely the bank is to approve the deal. On a related point, you'll need to agree to an installment schedule which is sufficient to keep the outstanding loan balance comfortably beneath the truck's declining value, over the term of the loan.
    • If you have other income source(s), and/or other collateral to put up against the loan, that always helps.
    • Having someone else guarantee (co-sign) the loan would also help.

    Whether or not you need any one, two, or all three of these additional credit supports depends, of course, on the facts and circumstances of the situation. Also, banks' lending methods, criteria, and appetites aren't quite as homogeneous as one might think. One bank might accept a deal that another passes on, and sometimes it's a matter of visiting successive banks until you find one willing to lend.

    But on the other hand don't waste valuable time continuing to knock on doors, if you keep getting clear vibes from the bankers that your deal just isn't do-able. In such case you'd want to revisit those aforementioned bullet points, and see what you can do to sweeten the deal in a bank's eyes.

    Best of luck with the new venture.
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  3. Mark T

    Mark T
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    Dec 28, 2011
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    The best way you can do is to seek advice from a financial expert / CPA that can do audits and give you financial advice on your situation. We can give you our own opinions but still, the best option is face-to-face meeting with an expert on that part.

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