Tips For Business Loans

Securing small business financing is one of the first things a new business owner needs to consider. How will you finance the start-up phase? When are you likely to be eligible for loans? Will you have to sign a personal guarantee? What will make your business loan application appeal to lenders?

This article provides tips for getting a small business loan for a startup business.

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Be Ready to Borrow

Put together all of the information needed for your application, beginning with your business plan. A well-developed business plan will help you understand how much money you need and the types of small business loans that you want to secure in the future.

Your business plan should identify start-up costs, an operating budget, and a break-even analysis. With this information in hand, you can decide the financing your business needs and when.

You may need 6 -24 months of business experience and a cash flow analysis before you can apply for some types of business loans. That may mean personal borrowing to kick start your business until you’ve got a track record and financial statements to show your business is viable.

Make Sure Your Personal Credit Score Is Good

In the months when a business is too new to qualify for traditional business loans, many business owners turn to:

• A personal loan from a bank, a credit union, or an online vendor
• A personal line of credit against a home mortgage
• A personal credit card
• A business credit card

A personal loan, personal credit card, and business credit card are all unsecured loans. They require no collateral. A line of credit against a home mortgage is secured by the home or real estate. All of these funding sources will require a good personal credit rating.

Before you apply, take a look at your bank statements, credit report, and credit history. Will the bank or credit card company see someone whose personal finances are in order?

If your credit score is 630 or below, you have bad credit. If you do secure a credit card, it’s likely to have a very high-interest rate. Even if you repay interest only, your new business could end up in trouble and your personal credit rating could suffer even more.

You may need to take some time to improve your personal credit score before you start your business. Or you may need to expand your loan options. Ask friends and family for personal loans. Apply for a microloan through a community development financial institution. Although they don’t provide a lot of money, some microloan funds are open to new businesses and those with bad credit.

Be Clear About Why You Need the Small Business Loan

There are many types of business loans. Some are for specific purposes, some for specific industries, and some for certain types of business owners or geographic areas. Before you look for a loan or business line of credit, write down the details:

• How much money do you need (the loan amount)?
• What is the loan for? Startup costs, working capital, expansion, equipment purchase, real estate purchase, purchase of long-term assets like land or machinery, inventory, supplies, export sales?
• How long will you need the loan? It’s easier to pay higher interest on short-term loans rather than on long-term financing.

What Terms Are You Looking For?

Go back to the financial information you gathered for your business plan. Knowing the loan amount you are looking for, what kind of terms are most desirable? What would be acceptable?

• Interest rate
• Annual percentage rate (APR): APR includes loan fees and the interest rate. SBA loan APR is capped but online small-business lenders could have APRs as high as 99%.
• Loan payment amount each month
• Repayment terms, such as the length of the loan

Identify ALL Your Business Financing Options

There are a lot of business loan options out there. Only some of those loans will be right for your business.

The U.S. Small Business Administration is often the lender of choice for small businesses. They offer:

• 7(A) loans up to $5 million
• Express loans up to $500,000
• 504 loans up to $5.5 million for long-term expenses
• Community Advantage loans up to $250,000
• SBA disaster loans up to $2 million
• Export and International Trade loans up to $5 million
• SBA microloans up to $50,000

Business banks typically offer small-business bank loans with the lowest interest rates and most competitive terms. Many small-business lenders require at least a year in business to qualify for financing and they want to see a credit score in the 700s and strong revenue.

Community Development Financial Institutions (CDFIs) can take the form of a bank, a credit union, a small business loan fund, or a venture capital provider. Their goal is to expand economic opportunity in low-income communities. They bring together public and private sector investors to offer low-interest loan programs.

Credit unions can be easier for small businesses to get a loan through, especially if the business owner is a member and has a bank account at that credit union.

Online lenders offer personal business loans based on the business owner’s personal credit history. For borrowers with no business history or a low credit score, an online lender could be the answer. They tend to have more flexible eligibility requirements, a simpler application process, and faster approvals but they charge a higher interest rate.

Microloans: The SBA offers microloans, as do nonprofit organizations that focus on underserved communities. Microloans can be available for $5,000 up to $50,000. They may offer discounted interest rates for certain types of borrowers (veterans, people of color, immigrants). They may allow borrowers with poor credit to apply.

Lines of Credit: The SBA offers lines of credit that are a flexible form of short-term financing. A line of credit provides a reservoir of money that you can draw on as needed. You pay interest only on the amount you borrow. There are five available SBA lines of credit:

• Seasonal CAPLines: For small businesses with seasonal ups and downs in revenue.
• Contract CAPLines: For small businesses that need funding to execute contracts.
• Builders CAPLines: For builders and general contractors who work on residential or commercial buildings.
• Working CAPLines: For small-business owners who need working capital for operating expenses.
• SBA Express Lines: Offering faster funding but with lower borrowing maximums.

The SBA isn’t the only agency to offer lines of credit; commercial lenders and online lenders do as well.

Personal and business credit cards can provide cash advances when needed, though usually at a higher interest rate than a loan or line of credit.

While you are at it, look for business grants, too. City economic development departments and neighborhood business associations often offer grants to spur small business development in certain areas.

Consider putting together a spreadsheet with this information:

Now Focus on the Loans You Are Most Likely to Receive

If you talk with other small business owners they may tell you they’ve received loans from the U.S. Small Business Administration, or this bank, or that program. There are a lot of business financing options out there. Only some of those will be right for your business.

Now that you have a spreadsheet of loan options, prioritize them so you focus on the ones most likely to fit your business needs and qualifications.

Overcoming Loan Barriers

You’ve applied for small business loans for which you should have qualified, but you were turned down. What could be standing in your way of getting a business loan?

• Bad credit: A FICO credit score below 630 would disqualify most applicants. Lenders would like to see a score of 720 or higher.
• Prior default: If you defaulted on prior loans, your chances of getting a new loan are poor. For an SBA loan, a default on any other government loan (your student loan or FHA home loan) means there is no chance for a business loan. If you are behind on loan payments, pay up first before you apply.
• No collateral: Lenders often ask the borrower to put up collateral and a down payment on the loan. That is, some cash and an asset the bank can hold as security that the loan will be repaid.
• No skin in the game: If you have assets but you don’t want to use them, you will have a hard time getting an SBA-guaranteed loan. You might still qualify for other types of loans.
• A criminal record: An arrest record and criminal charges can delay a loan application or disqualify a small business owner from applying for a loan altogether.

Learn More About Startup Financing

FindLaw’s Start a Business section offers a lot more information about how to finance your startup small business. See Startup Financing for ideas on getting money from family and friends, financing basics, crowdfunding, venture capital, and more.