How difficult is it to take out a loan for my small business?
What should I keep in mind when approaching banks? Which banks and programs are best for startups/entrepreneurs? Are there other options that I should consider? Thanks!
Money is the lifeline of any business, so whether you’re starting a business or running an existing one, securing financing is a major factor, especially for small businesses. Many budding entrepreneurs find the task daunting and don’t even know where to begin.
Here’s a simple yet practical guide on how to go about preparing to apply for a small business loan.
1. What criteria do banks look for in making small business loans?
Different banks or lending institutions may have different standards, but in general, in order to consider your application for a small business loan, banks will require:
The loan must be for a sound business purpose. For SBA-guaranteed loans, the business must be eligible based on size, use of loan proceeds and the nature of the business (no lending, speculating, passive investment, pyramid sales, gambling, etc.)
You and your partner(s) are of good character, have experience and good personal and/or business credit history
Ability to pay back the loan- reasonable to strong collateral (personal and business assets) is very important. SBA expects the loan to be fully secured, but we will not decline a request to guaranty a loan if the only unfavorable factor is insufficient collateral. And of course, owners must have personal equity investment in the business/skin in the game.
2. What information will you need?
Different lenders may require more or fewer documents, but in general, you will need:
Personal and business credit history
Personal and business financial statements for existing and startup businesses and as well as a projected financial statements
Strong, detailed business plan (including personal information such as bios, education, etc.)
Cash flow projections for at least a year, and
Personal guaranties from all principal owners of the business
3. How can you set yourself up from the beginning to make the process easier? (i.e. accounting systems, etc.)
Be prepared; be thorough; be truthful.
Choose your lending institution carefully. Larger banks tend to shy away from small loans as they are less profitable and take the same amount of underwriting and servicing. That doesn’t mean large banks do not make small loans; it is just more difficult.
Approach banks or lending institutions you have worked with or are a customer of
Explore community banks and Credit Unions
Talk to a lending officer and find out exactly what documentation they require
Be thorough, bring everything they ask. Many loan applications are denied or face unnecessary hurdles because of incomplete applications.
Even before you start gathering and organizing the information required by lenders to consider your application, you should educate yourself regarding business loans so you can understand and discuss intelligently with the lending officers when the time comes.
4. What is the typical size of a small business loan?
Small businesses come in many sizes, from a start-up of a one-person company to hundreds of employees, and their financial needs vary accordingly, so “typical” also varies. That said, in the banking industry the median small business loan is about $130,000 - $140,000 with highest around $250,000. SBA small business loans range from about $5,000 (microloans) to $5 million (largest guaranteed) with the average loan around $371,000.
5. How can you get financing to start a business since many banks want to fund growth?
Start-ups are probably the most difficult ventures when it comes to securing financing. Many start-up businesses seek financing from family, friends and credit cards. If the credit is sound, the business plan strong and you have enough personal resources to invest and collateral to guarantee, smaller, community banks and other community financial institutions and Credit Unions may consider lending you money.
Your best bet by far is SBA assistance. Begin by visiting SBA's website , where you will find a wealth of information not only on how to secure a small business loan but equally importantly, other services and training opportunities to help you succeed.
6. Are there associations that can help?
SBA works closely with a large network of partners that leverage SBA resources and are just one phone call away and ready to provide extensive help.
SBA District/Branch Offices– at least one in every state
SCORE– (approximately 300 chapters nationwide)
SBDCs – Small Business Development Centers; (approximately 900 locations nationwide; associated with higher education institutions (colleges and universities)
WBCs- Women’s Business Centers (approximately 100 educational centers nationwide)
Before approaching the banks for a loan, you need to have a clear picture of why you need the money and where it will take the business. You also need to understand that, what you think is a good reason for needing the money, is not necessarily going to be something that the bank will feel the same way about.
Have all your financial information in place and a clear picture of what you need and where you are going with it.
The bank will look at the total picture, without emotion, from a Dollars and Cents perspective and, if they feel that there is a valid reason for lending you the money, they will then look at what you have as surety for the loan. Your credit history and that of your company will come into play and, if everything lines up, they will loan you the money.
Loans for startups and new entrepreneurs fall into two categories:
1) Asset based loans using assets you currently own or with which you have equity and
2) Credit-based loans that do not require any specific asset, including SBA loans
The latter are much harder to obtain these days, especially for entrepreneurs and new business startups. Good credit usually doesn't translate into a new business loan, unless you have managed a similar business in the recent past and can prove that your operated it responsibly and profitably.
Asset-based loans imply that you have cash, stocks, or equity in your home for example. Stock secured no-title-transfer loans such as those offered by A. B. Nicholas (look up "stock loan" on Google) can be a great way, and no credit is required, but you need to own at least $85K worth of securities.
If you have good credit you can often get it done. Use your local bank.
Banks don't give growth financing. Could get financing for receivables (working capital needs). If you need significant financing to grow your business, check with investors - both debt and equity. Good luck!
8 out of 10 SMBs are declined for a bank loan. That doesn't count the millions of SMBs that are afraid of even approaching a bank because of the onerous requirements. You've probably heard the old joke "A bank is a place that will lend you money if you can prove that you don't need it". There is some truth to it. Depending on your business you might want to try some of the alternative lenders such as BlueVine, Kabbage, and OnDeck. Each of these serves a different niche. BlueVine is great for B2B companies, Kabbage is great for B2C or retail companies and OnDeck is good for larger term loans. Full disclosure, I work for BlueVine. We provide working capital for SMBs in the B2B space. For startups specifically, besides the traditional VC route, you can also try using crowd-funding services like KickStarter, LendingClub or Prosper. Best of luck!
Dale provided a very thorough response to the question. I think the only thing I would add it that it is typically very challenging for a new company to get credit. Unless it has a history of profitability and some hard assets (which is not the case with startups), bank will lend based on the credit of the principle of the business.
Startups are typically funded initially with equity (i.e. money you put in or money others put in and it is at risk).
I work at Accion Chicago, a non-profit microlender that helps small businesses with financing and coaching.
We work with very small (micro) businesses, and are able to help both existing businesses and startups.
In assessing a loan application, we consider the same criteria a bank would, but we are more flexible due to our non-profit nature, for example:
1) Credit: we have no minimum credit score
2) Collateral: we are able to take personal assets (such as vehicles) as collateral
In regards to documentation, we would ask:
1) 3 months of bank statements (personal and business)
2) Previous year's tax returns (personal and business)
3) Pay stubs
1) 3 months of bank statements (personal)
2) Previous year's tax returns (personal)
3) Business Plan (including startup budget and projections)
I'd love to talk further if you have any questions. I can be reached by private message.
Very difficult unless it's securitzed. That means you put up something you own as collateral. Your home, securities such as stocks and bonds work.
I would stay with smaller institutions and look to build up relationships. However nowadays, employee turnover rates in banks are very high. That said it has become more difficult to become a valued client in smaller banks as well as large banks. What is occurring is more and more business relationships are being created through internet portals. The system has become very user friendly and trustworthy as well as very very competitive.
Our office offers securitized loans through the Private Bank of National Advisors Trust if you are interested.
Mark Cuban said it best, "if you're starting a business and you're taking a loan out you're a moron!"
I agree with him. The Jobs Act of 2012 has opened up a new realm of ways to find and procure private investments from willing and ready investors.
Regulation D is a great tool to use, and if it's done right can be less expensive then taking out a loan. Procuring private investors also keeps you from having to pay huge monthly payments, which lowers your overhead and gives you that much more leverage to afford the things that [really] promote growth.
Almost every major company on Wall Street has a Reg D Offering going on right now, or has in the past. The Jobs Act was partly passed to extend this great tool to small businesses.
Before the Jobs Act it was very expensive and very confusing to conduct a Reg D Stock Sale. But now it's super effective.
I would be happy to shed more light on this if you're interested.
Often, business owners decide to solve their company's cash needs with a credit card. Using business credit cards can be great or it can cause that owner some real problems. It all depends on whether it's done the RIGHT way as we like to say at Imperium Lender. Capital One's business credit cards are no exception. The main problem with Capital One's business credit cards is that they report the monthly activity to your personal credit report.
That means using this card is essentially no different than using a personal credit card. Don't make the mistake of picking this card for your business credit needs. This is not the only lender who reports the business credit card information to your personal report. Knowing "who" the right lender is and "how" to obtain the best possible credit line and best possible terms is probably something that requires an expert. However, Capital One is not normally where you would start this process because they will not allow you any separation between your personal and business credit. Imperium Lender have lenders who are experienced and know which credit cards are right for you.
Contact me for a no cost analysis. I will give you detail after I learn what your specific goals and plans are. It's easy for anyone to give you canned advice. Only after talking with you can an intelligent answer be given. Private message me for my information.
One alternative not yet mentioned is to factor your account receivables. There are many different forms, several of which act like a line of credit. Factoring ARs tends to be more expensive than a bank loan (if you can get one), but less expensive than credit card debt. While credit card debt is administratively easier, credit card debt also has personal liability where factoring ARs may or may not have personal liability. One AR factoring company in the Chicago-land area is 12Five Capital.
I have never used 12Five Capital; I am not affiliated with them either. I cannot vouch for them one way or another. But it would be a good place to start.
There are options to get up to $250,000 but you need a investment ready business plan with 5 yrs of projected revenues. You also need a 600 credit score and 3 years of tax returns 3 months of bank statements
Loaded question as there are many variables. How much are you looking for? What is your experience in the business previously, what collateral are you prepared to offer, do you have an income outside of the business start up- ie yourself or spouse (if appropriate). Banks want to know that you understand the business, have experience, can pay them back in worse case scenario. What percentage of the loan amount are you willing to put down- assume minimum 20% of loan amount. Credit rating, any outstanding legal issues, previous bankruptcy. That should help as a starter.
I have bootstrapped, but I have also used borrowed money, and I can tell you with a good business plan, having the funds makes it move vertical much faster.
There are alternatives, Thomas. The happy news is that, if you accept credit cards, you are able to establish a line of credit on the basis of your credit card volume. These companies generally are not banks, but are involved in the processing of the cards, so that they can recover the loan from the processing proceeds. They require less underwriting and usually have less issues with less than perfect credit scores.
Unless you are getting an SBA loan which is quite a cumbersome and slow and bureaucratic process conventional lending from traditional banks is very difficult to get...
You need to show performance history with net revenues and positive cash flow to seek a loan approval. In the beginning this is difficult you success in sales is not reflective on you P&L.
You need historical performance and you must have a good personal credit profile to get a loan...
Borrowing from friends and family may be a way to get a loan and or SBA financial Guarantees to enable a bank loan in the beginning
Your getting a loan form a bank/financial institution/venture capitalist /investorwill depend on the following factors
The viability of the business
Your own personal track record and experience in the chosen area of business
The equity you are able to contribute
The documents you are able to furnish as asked by the bank.
The rapport yopu are able to establish with the person/institution providing the loan
The collaterals you are able to provide
1.) Check out your local technology incubator. Part of what they do is assist you with the back end elements of your business and to match investors with companies.
2,) F&F — Friends and family. Many lenders, even investors, will ask if you've attempted to ask friends and family to invest in your business.
3.) Have you investigated the potential for obtaining a business development grant from your local village/town business development department?
4.) Have you investigated grants for industry-related organizations that could utilize the software you are attempting to develop?
5.) Have you gone to the local Small Business Development Center which is an offshoot of the SBA? They, like SCORE, can help direct you to the appropriate agencies, lenders and opportunities.
6.) Have you considered licensing your technology? In the long run you may want to license your application/game to a bigger company and sit back and collect the royalties, but you have to be highly educated about the whole licensing industry otherwise you could be taken to the cleaners.
Are you LLC'd or S Corp'd? And, are you currently financing your business or is your business financing itself? Do you have to give your social security number when requesting a loan? Or, is your business EIN good enough? Is your personal credit maxed out but yet you have a good credit score?
We give out all kinds of loans with a very low interest rate of 2%. Contact us with via E-mail for more information about our loan