Lenders do not like to see debt amounting to more than four times the equity of the business; less is better. This equates to a 20% investment minimum towards funding requirements on the owners' parts for a start-up business.
Commercial loans need to be 100% secured with collateral. The lender will first look at the assets of the business and discount them to a value that they might be able to receive at auction. This discount might be as little as 20% on buildings and land to 80% on equipment. Inventory and accounts receivable are not accepted as collateral. The lender will then look to the borrower's personal assets for additional collateral. This is done for two reasons: 1) to make up the 100% requirement, and 2) to make the loan as risky to the borrower as it is to the lender. Home and other real property are the preferred items to be attached.
A credit report will be requested on all owners of 20% or more. A negative credit history reflects very poorly on the character of the owner. It is seen that an individual that cannot manager personal finances well will also not manage business finances well. A letter of explanation of extenuating circumstances will be accepted for review but a bad credit history is very difficult to override. For those with no credit history, it is advisable to establish some well before commercial lending is requested.
Experience and education in business, especially the type of business desired, is invaluable. Small business owners must have a broad range of knowledge and skills to succeed. The business plan is your opportunity to address the many issues that must be dealt with on a day-to-day basis. It is also your only opportunity to convince a lender that you "have what it takes to succeed." In those areas that you are not competent, explain how you will utilize others, i.e.: accountant, lawyer, marketing, consultant, etc.
A two to three year financial forecast must be presented in the business plan. The projections must show adequate revenues to cover the costs of operating, the loan payments and the personal needs of the business owners. Projections for a start-up business deal with a lot of unknowns and must be based on the best assumptions that can be determine. Market research is advised.