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Tag Archive for: business loans

Small Business Loan Application Checklist

Financing, Manage Your Money
by Vince Calio11 minutes / August 15, 2023
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Business Loan Documents Checklist

Applying for a small business loan can be a tricky process, as there are several requirements you need to meet in order to obtain one. Those requirements can be confusing, as lenders require everything from business licenses and cash flow history to business plans and personal financial statements. 

Whether you are applying for a business loan from a traditional bank, alternative lender, or credit union,  as a small business owner in need of financing, one of the ways you can untangle the process is to use the following small business loan checklist.  This checklist will help to ensure that you are ready to apply with confidence. Knowing what documents are needed for a business loan ahead of time will keep you organized and possibly help you get a reasonable interest rate on your loan. 

Things to Consider Before Applying for a Business Loan

Before even beginning to collect your business loan paperwork,  there are key factors you should consider:

Why do I need a loan?

This is perhaps the most important question you should ask yourself before applying for a small business loan. Getting a business loan just to have the money you borrowed sit around while you pay interest on it is obviously a bad idea. 

  • Ideally, the proceeds of a business loan should be used towards growing your business so that it can increase its revenue. For example, if you need money to develop and market a new product; purchase or upgrade equipment; expand your business by hiring new employees; or adding to your inventory would all be ideal reasons to obtain a loan. 
  • There are also financing products, such as working capital loans and business lines of credit, that can help your business operate during the offseason or when there’s a downturn in the economy. 

Can I afford a loan?

Everyone knows that loans carry interest rates, and those rates are, in part, affected by the current interest rate environment. The Federal Reserve has raised interest rates 10 times in the past year-and-a-half, and that’s going to make the interest rate on virtually every type of business loan you want to take out more expensive. If you can afford to wait, you might want to hold off on getting a business loan until rates drop again. 

What type of lender suits me best?

There are several types of lenders who can provide you with a small business loan. Those include traditional banks, alternative lenders, trade unions, marketplaces, and brokers. Each one comes with pros and cons that you should consider carefully. Some lenders, such as traditional banks and alternative lenders, offer financing products directly, while brokers typically offer you a marketplace of lenders. Also, some will demand higher business and personal credit scores than others, and some can deliver your funds more quickly than others. Carefully consider which one best serves your needs.

Can I get a grant instead?

There are, of course, several public and private business grants available to small businesses – some of which are backed by the US SBA. These grants often have specific criteria for applying. For example, some may be offered to small businesses in certain industries, and others may be offered only to women- and minority-owned businesses. Determine whether you qualify, but remember, applying for these can be a roll of the dice and you’re not guaranteed to win a grant. 

Do I have a plan B?

All small business owners have the best of intentions when applying for a business loan, but life happens, and sometimes it won’t go your way. Before you take out a loan, it’s a good idea to make a contingency plan if things go south and you find yourself struggling to keep up with debt payments. Bankruptcy should be a last resort. Do you have assets you can sell? Do you have a cash reserve that you can draw upon until you get back on your feet? 

Small Business Loan Documents Checklist

Go over this business loan documents list to make sure you are prepared for the sometimes overwhelming process of applying for a business loan. Doing so will simplify and hasten the process of getting the funding you need for your small business. 

Check your credit scores  

All lenders will pull both your personal and business credit reports. You can check your personal FICO scores online for free at the websites of the three main credit bureaus, Transunion, Experian and Equifax. You may have to pay a fee to get detailed reports so that you can check for errors. You can check your business credit score at the website of Dun & Bradstreet, the business credit bureau that is most heavily favored by lenders, for a small fee. 

If your personal FICO and business credit scores are less-than-stellar, you may want to consider taking 6-9 months to improve them so that you can increase your chances of being approved and get a better rate on your loan.

Prove that your business exists

All lenders will require documentation proving that your small business is registered as a tax entity. At the very least they will require your employee identification number, which is issued by the IRS, and proof that your business is registered as a LLC, “Doing Business As” (DBA) company, or an S or C corporation. Lenders will also require proof of identity, pay stubs, and your social security number as well. For an SBA 7a loan or a term loan from a traditional bank, the lists of documents required can be even longer and include items such as business licenses, business lease agreements, proof of equity injection and franchise, and licensing agreements if you plan to franchise your business.

Have a business plan

If you plan to apply for a term loan with a traditional bank or for a SBA 7a loan, chances are you will need to show your business plan. This is a plan that shows how your business is organized and typically includes a market analysis and what niche your products and services fill, how they differ from your competitors, and why you believe your small business will be successful going forward. In short, it details why you believe your business is going to make money.

Financial Statements

Almost all types of lenders will want to see your business’s financial documents that indicate it has a strong cash flow history, including, but not limited to 3-6 months’ worth of business bank statements, 2-3 years of tax returns, balance sheet statements and income statements. 

Run a cash flow analysis

Cash flow is one of the primary indicators that lenders use to understand the health of your business. Being able to show 3 to 6 months of positive cash flow can increase your chances of approval. It can even get you better financing terms for your small business loan. 

Collect your business bank statements 

Your business accounts are another good indicator of your company’s financial health. Generally, lenders want to see a positive daily balance on your bank statements for the past 3 to 6 months. 

Gather  supporting documents for unusually large deposits

Unusually large deposits can act as a red flag for lenders. While the  presence of these deposits can delay finalization of loans, they are not necessarily bad. Many businesses understandably have large swings in deposits and credits to their account. If your business is like that, you can expedite your loan application process gathering copies of your account receivables and future contracts to support these large deposits.

Take care of delinquencies

Many lenders only want to lend to people whom they believe are of high character. This is especially true when you’re applying for SBA loans. As such, if you have any tax liens or are late on child support payments, you should take the necessary steps to clear those up before you apply. 

Resolve any open tax liens

Unresolved open tax liens can hurt your ability to obtain financing. If possible, try to get a payment plan set up on any open tax liens you may have before you apply for a loan. A payment plan on a tax lien, along with a very strong positive cash flow will typically be considered by alternative lenders and even some SBA lenders for loan approval 

Assess any collateral you may have

Before you apply for a loan package, you may want to sit down with a business loan specialist or an accountant to see if you need to put up collateral. This includes real estate, investment holdings, savings and even your car or valuable pieces of equipment you may own. Traditional banks often want collateral if your business credit or personal FICO score is shaky. In rare cases, alternative lenders may ask for collateral. Even if you have good credit, it might be worth applying for a secured bank loan or business line of credit because you may be able to notch a lower interest rate and a higher credit line or loan amount if you put up collateral. 

Get trade references

If your business credit score is borderline, you can boost it by getting positive references from either your suppliers or, if you lease a physical space, your landlord. You can give these references to your credit bureaus and, if you’re using a traditional bank, to the loan officer. Having these could mean the difference between obtaining a loan or getting rejected. 

If you get Rejected

Getting rejected for a business loan isn’t pleasant, but it can be a valuable lesson on how to get accepted the next time you apply. Traditional banks and alternative lenders want to grant you a loan approval because it’s the way they make money. As such, they will be happy to give you a detailed explanation for why you were denied, and, usually, it will take a bit of time to improve your business to the point where you can obtain that business loan.

While every rejection is different, some of the most common reasons for getting rejected for a business loan are:

Your business credit score is not high enough

Some of the ways you can raise your business credit score include:

  •  reducing the number of creditors you owe money to
  • making sure you make debt payments on time for at least 6-9 months
  • having a strong credit mix. 

Other steps include being in good standing with your suppliers and increasing the assets of your business. 

Insufficient time in business 

Traditional banks typically won’t lend to a small business that hasn’t existed for at least three years, while alternative lenders may want to see at least two years in business. If this is the case, hold off on borrowing until your small business has been in operation for a sufficient time. If you can’t wait, see if you qualify for an SBA CDC/504 or SBA microloan, both of which only require 6 months in business. 

Too much existing debt

This is actually a common reason why small businesses get turned down for a loan. If you already have outstanding loans, you can always try to retire them with a new loan. Additionally, if you have a line of credit that is close to being fully drawn, you should take steps to pay it down before applying for a new loan. 

Your cash flow is not strong enough

If your small business’s cash flow is tight (meaning you are spending almost as much money as you are taking in), take steps to fix it by finding ways to reduce your expenditures. 

Your industry is too risky

If your small business operates in an industry in which there are higher than average bankruptcies, or if it operates in what lenders may consider “vice” industries such as gambling, alcohol, or legal marijuana dispensaries, you will most likely get turned down no matter how financially strong your business is. A quick Google search, however, can most likely lead you to legitimate online lenders who specialize in lending to companies in your industry.

Don’t Get Frustrated

Remember, when applying for a business loan, patience and weighing the pros and cons of different lenders are often the keys to getting the funding that you need to help your business grow. Go down the checklist of items that you need to take care of in order to be ready to apply, and carefully consider the pros and cons of the different types of lenders out there so that you can get the financing that is exactly right for your business. 

Vince Calio

Vince Calio

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Getting a Business Loan with Bad Credit

Financing, Manage Your Money
by Vince Calio13 minutes / August 15, 2023
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Bad credit business loans

Most of us have faced financial hardship at some point that resulted in some missed debt payments, defaults or charge-offs, and this has negatively impacted our credit scores. After all, life has its ups and downs, especially when it comes to our finances. For small business owners who find themselves in this situation, one of the questions they may be asking themselves is, “Can I apply for a business loan with bad credit?”

The simple answer is yes. There are plenty of lenders that offer business loan options for bad credit, and there are several types of financing that don’t emphasize FICO scores as much as cash flow history and strong sales. So, if you’re one of the thousands of small business owners wondering where to get business loans with bad credit, you might be relieved to know that you have several financing options.

Before you delve into answering the questions of how to get a business loan with bad credit, there are several factors you should educate yourself on, such as how can you improve your credit score and what you can afford to pay in terms of an interest rate on your loan, given that loans for businesses with bad credit often charge a rate that’s on the highest end of the APR spectrum. 

What is Bad Credit?

When looking into how to qualify for a business loan with bad credit, the first thing you need to know is that a low credit score depends on the type of lender you are considering. Traditional banks are still the most popular type of small business lender, but they typically want to see higher credit scores for financing products such as term loans and business lines of credit than an alternative or online lender. Generally, they consider a FICO score below 680 to be poor. Alternative lenders and credit unions, however, generally – but not in all cases – will accept scores within the 650 – 680 range, depending on the type of financing the small business owner is seeking.

There are online lenders that will accept a FICO score as low as 500 but will charge an inordinately high interest rate (cost of capital), depending on the type of financing you’re seeking.

How to Improve Your Business and Personal Credit Scores

Generally speaking, having to obtain a business loan with a poor credit score isn’t an ideal situation. If you can afford to wait several months for a loan and take that time to improve your FICO score, you could save a good chunk of money in terms of the cost of capital. Doing so is not as difficult as you might think. 

The two types of credit scores you will need to improve: your personal FICO score, and your business credit score, if you have one. Most lending institutions and credit bureaus such as Transunion, Equifax, and Experian are happy to give you advice on how to improve your personal credit score. For a business credit score, Dun & Bradstreet is the credit bureau looked at the most by lenders. 

The main factors that affect your FICO score and how to improve them are:

  • Payment history. Nothing will drag your FICO score down more than having a history of delinquent payments on your debt. This includes monthly payments on things such as credit cards, car financing, and mortgage/rent. If you want to dramatically improve your credit score, make sure to make on-time payments for at least 6 months. The longer you make on-time payments, the better your score will be.
  • Debt-to-credit ratio (aka credit utilization). Credit bureaus do not look favorably upon small business owners who have a low amount of available credit compared to the amount of credit available to them, as this tells them that you are having a hard time managing your debt. If you have the time and discipline to do so, try to pay down as much debt as you can over the course of 6-9 months to bring up that ratio. You may even want to consider applying for a new credit card to bring that ratio up. Increasing this ratio will do wonders for your credit score.
  • Length of credit history. While this is a big factor in determining your FICO score, it’s not one that can quickly be fixed. This is the age of the debt accounts on your credit report. The longer you have open account, in good standing with your creditors – including your credit card companies, car financing company, and your mortgage holder – the higher your credit score. 

A business credit score incorporates most of the same factors as your personal FICO score such as your business’ loan and payment histories. There are a few differences, however. First, a business credit score will look at: 

  • Industry risk. Your business credit score will incorporate how risky the industry in which your small business operates is. If it operates in one that has a high failure rate, such as the restaurant/food service industry, that could negatively impact your business credit score. In this case, having a strong business plan becomes even more important. 
  • Good relations with your suppliers. There is a little-known action that many small business owners can take to improve their business credit score: getting trade references. If you have good relationships with your suppliers and have a history of on-time payments to them, they can send a note called a trade reference to the credit bureaus telling them such. Doing this can immediately improve your business credit score.

Where to get a Small Business Loan with Bad Credit

If you need capital now and can’t afford to wait 6-9 months to improve your credit score, there are lenders out there that are willing to lend the capital that you need. Traditional banks are more risk-averse and generally won’t approve loans to those with bad credit. The lenders that do, however, include:

  • Online lenders. A quick Google search will lead you to a host of reputable online lenders that are willing to supply you with an array of financing options such as term loans and business lines of credit and require a FICO score as low as 500. While every lender has their own set of terms, the cost of capital for these forms of financing is typically extremely high, with some being above 30%.
  • Alternative lenders. Alternative lenders that operate outside the sphere of traditional banks often allow loans to business owners with lesser credit scores than their banking counterparts. They often charge higher interest rates and will accept borrowers with fair-to-good credit scores in the 620-680 range, depending on the type of financing you are seeking. This is because they often emphasize annual revenue and cash flow history as well as credit score.
  • Trade credit unions. Credit unions are owned by their members, and many of them will give loans to small businesses in their own industries, even to those with less-than-stellar credit scores. Many credit unions will also look favorably upon small businesses that employ unionized workers.
  • The SBA. While the SBA 7(a) loan – which is the first loan that most people think of when they think of the SBA – often comes with strict requirements such as a high credit score, other SBA loans do not. SBA microloans and CDC/504 loans do give loans to small business owners with less-than-perfect credit scores through intermediary lenders, and these loans usually carry relatively low interest rates. The two catches for these loans are that they usually do not offer high loan amounts (the maximum for each is $50,000), and depending on the lending agent, these loans are sometimes restricted to minority- and women-owned small businesses, or businesses in underserved communities that are committed to additional hiring and renovating their storefronts.

Types of Financing for Bad Credit

Many people just think of bank loans when it comes to small business financing. There are, however, several types of financing that don’t place a heavy emphasis on credit score and can even offer small business owners a lower cost of capital than they might otherwise be able to get:

  • Secured business loan. If you have poor credit, securing a business loan with collateral may decrease your cost of capital and could even increase the amount you are able to borrow for your small business. Any savings, real estate, investment accounts and any other personal items of high value can be used as collateral. While you do risk losing these things if you fail to pay back the loan, having enough collateral can even convince a traditional bank to give you a business loan, despite a poor credit score. 
  • Revenue-based financing. Revenue-based financing is offered almost exclusively by alternative lenders and is a form of financing that can quickly offer a lump sum of cash in exchange for a portion of your small business’s future receipts. It’s technically not a loan and lenders often look more closely at your business’ sales history rather than its credit score.  
  • Equipment financing. Most traditional banks and alternative lenders offer equipment financing – loans that enable small business owners to purchase vital pieces of equipment. This type of loan is often made to small business owners with less-than-stellar credit since the piece of equipment being purchased acts as collateral for the loan. Like most loans, however, the lower your credit score, the higher the interest rate, so it’s important to shop around to find the loan with the lowest cost of capital. 
  • Invoice factoring. Invoice factoring gives small businesses a lump sum of cash for their outstanding invoices, and therefore, credit score usually isn’t a factor when lenders decide to approve this type of financing. Rather, the creditworthiness of the customers who owe you money is. Invoice factoring is offered by both traditional and alternative lenders. When using this type of financing, it’s important for small business owners to read the fine print to find out the length of the contract and whether they will be on the hook for a portion of outstanding invoices in case customers do not pay the amount due. 
  • Secured business lines of credit. A business line of credit gives small business owners access to a predetermined amount of cash when they need it and only charges interest on the amount borrowed. If you have poor credit, there are lenders willing to give you access to a line of credit but with a very high interest rate and a limited credit amount. If you offer to secure the line of credit with collateral, however, this could dramatically lower your interest rate and increase your chances of being approved. As with any business line of credit, it’s important to read the fine print to understand the repayment terms and minimum borrowing amounts. 

What to do Before Applying

Even if you have a fair or poor FICO score, there are steps you should take before you complete a loan application to get a business loan or other type of financing for your small business to ensure you get the best possible interest rate or APR, as well as avoid hidden fees if possible. 

  • Wait to improve your credit score. As stated, there are better situations than having to get a loan when you have a poor-to-fair credit score. If you’re not in a rush for a loan, consider taking the time needed to improve your score so that you can notch a better interest rate. 
  • Check your credit report. Check for mistakes on your credit report with all of the three main credit bureaus – Transunion, Experian, and Equifax. While you probably generally know what’s dragging down your FICO score, there could be errors and/or false charges on your report that are bringing it down. According to a study by the Federal Trade Commission, 1 in 5 consumers (20%) have at least one error on their credit report. 
  • Compare interest rates. Just because you have a low credit score doesn’t mean that different lenders won’t offer you different rates. While most lenders don’t disclose rates upfront, ask what the rate will be once you’re pre-approved. 
  • Read the fine print. Depending on the lender, it’s crucial that you carefully read the terms of whatever piece of financing you’re taking on. Some lenders may want balloon payments or origination fees, while others may demand weekly instead of monthly payments. Find the repayment plan you’re most comfortable with. 
  • Be comfortable with your lender. This may sound intuitive, but make sure that your lender has sufficient customer service available to you. While you can always walk into a traditional bank, most alternative lenders also provide readily-available, personalized customer service by phone as well. 
  • See if you can renegotiate later. Bad credit takes a bit of time to fix, but it can be done. Ask your potential lender if you can renegotiate the terms of your loan down the road when your credit score does improve.

Additional Advice for Businesses with Bad Credit

Obtaining a small business loan with bad credit isn’t impossible, but it most likely will be costly. If you need a loan and you have poor credit:

Use the loan proceeds wisely. Make sure the loan proceeds will be used in such a way that will increase the revenue of your business. This includes the development, marketing and launch of a new product or service, or for the expansion of your business. 

Develop a plan B. No matter what your credit score is, the risk of taking out a loan or other type of financing is that you fall into hard times and can’t pay it back. To offset this risk, some of the ways you can develop a plan B is to build a cash reserve or make sure your lender will be available to refinance until you can get back on your feet. 

Don’t overextend. The idea of being able to obtain financing, even with bad credit, can be an exciting one. However, try to only borrow or use the amount of credit that you need and know you can afford to pay back. Finding your small business drowning in debt is obviously not a good place to be. 

In all, while bad credit is certainly an obstacle, there are still financing options for small business owners who are seeking to improve and expand their businesses and take advantage of unexpected growth opportunities. Carefully explore the options available to you and, at the same time, work on ways to improve your credit score. 

Vince Calio

Vince Calio

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Declined for a Business Loan? Take These Next Steps

Financing, Manage Your Money
by Vince Calio9 minutes / August 14, 2023
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Declined for a Business Loan? Take These Next Steps.

Life is a process of trials and errors, and there’s probably no one for whom that statement rings more true than a small business owner. This statement especially applies when small business owners apply for loans to gain much-needed capital to ensure their businesses grow or to smooth out their cash flows. What if, however, a lender denies your application for a small business loan, even though you thought you took all the necessary steps to obtain that financing? 

First thing’s first: while getting a business loan rejection is frustrating and disheartening, you need to keep a positive mindset. If your business loan was declined, don’t look at it as a failure, look at it as one of the many lessons you will learn as you run your business. There are specific steps you can take to make sure you get approved the next time around – and it might not take as long as you think. 

The following are steps to take after you’ve been rejected from a business loan and how you can improve your situation to increase your chances of approval on your next attempt.

Talk to Your Lender

The first thing you should do after being rejected for a small business loan is try to get into the mindset of the lender. 

Small business lenders – be it traditional banks, alternative lenders or credit unions – make money by giving loans and collecting interest and fees on those loans. Therefore, whenever a small business applies for a loan, they want to be able to approve it. So, if you do get rejected, give them a call, and they will be happy to give you the specific reasons why your application was rejected. 

Also, keep in mind that lenders are in the risk business. The simplest and most general reason that you, the small business owner, gets rejected for a loan is that the lender does not have enough confidence that you will be able to pay back the loan and believe that you represent too much of a risk of default. There are a lot of factors that go into deciding how risky you are as a borrower, and again, the lender will be more than happy to tell you which criteria you didn’t meet.

Improve Your Credit Scores 

When you apply for most types of business loans, the first two items the lender will look at are your credit reports – for both your personal credit score and your business credit score. One of the most common reasons small business owners get turned down for loans is that their credit scores aren’t high enough. 

You can find lenders that are willing to give loans to those with poor credit scores, but they charge exceptionally high interest rates. So,  if you’ve been turned down for a business loan because of your credit scores, it’s worth it to take the time and effort to take steps to improve those scores to avoid paying high interest rates. 

Some steps you can take are:

  • Check your credit reports. You can easily access your detailed, personal credit reports through the three main credit bureaus – Experian, Equifax, and Transunion, and you should check your business credit score through the most commonly used business credit bureau, Dun & Bradstreet.  Check for any errors that may be dragging your score down. Remember, in 2022 it was found that on average, 1 in 5 people had errors on their reports. You may have to pay a small fee to gain access to your reports, but it’s worth it in the long run.
  • Make sure you have at least 6-9 months’ worth of on-time payments towards your existing debts. This includes payments towards business and personal credit cards and any other debt your small business may have. Nothing hurts your credit score more than a history of late payments on your debt. 
  • Pay down existing debt. Credit utilization (the amount of debt you have on your credit cards or business lines of credit vs. your credit limit) is factored heavily into your credit score, so if you can, take a few months to bring that number down. 
  • Get another credit card. This might seem counterintuitive at first as you may be thinking, ‘The last thing I need is another credit card.’  However, getting another personal or business credit card (but not using it!) will decrease your credit utilization and can boost both your personal FICO and business credit scores.  BUT, note that this will only help in some situations and it may take some time for you to see the positive impact.  Getting a new card can initially lower your score due to the hard credit pull by the card issuers. In addition, a new card can lower the average age of your accounts.  However, the longer-term gain may just be what you need to tip the scales in your favor!
  • Get trade references. If you have good relationships with your suppliers, you can try to convince them to write letters to your credit bureaus stating such. These letters are called trade references, and they can boost your business credit score as most business credit bureaus don’t initially factor that into your credit report. 

 

Reconsider Your Financing Options

A term loan from a traditional bank isn’t the only way to get the capital you need for your small business, nor are traditional banks the only types or lenders out there. There are financing products in which lenders don’t put as heavy of an emphasis your credit scores, such as:

  • Secured loans. A secured bank loan or business line of credit will emphasize credit scores less since they are backed by collateral. 
  • Equipment loans. Equipment loans use the equipment being purchased as collateral, so your credit scores typically don’t have to be as high as they would for a standard business loan. 
  • Small Business Administration (SBA) microloans and  504 loans. These types of SBA loans are backed by the SBA and are often geared towards younger small businesses, women- and minority-owned small businesses and small businesses that operate in underserved communities, so lenders typically don’t heavily emphasize credit scores when approving these loans. 

Also, if you’ve gotten a loan rejection from a traditional bank (especially for a SBA 7a loan, which has very high standards) because your credit scores are borderline, you may want to try applying with an alternative lender. Alternative lenders often have simpler business loan applications and are more willing to approve borrowers with borderline credit than traditional banks. 

Improve Your Cash Flow

Almost every type of lender will want to see several months worth of bank statements for your business, as well as several years of tax returns in order to gauge your cash flow history. Cash flow is simply the money flowing into your small business vs. the money that’s flowing out. In some cases, you could get rejected for a loan if your cash flow isn’t strong enough. 

In this case, you may want to seek ways to improve that cash flow, but it may be a painful process. The most immediate way to improve your cash flow is to curb your business expenditures. This may mean letting some employees go and curbing excessive business expenses such as trips, business meals, cutting down on low-selling inventory, etc. Doing so could very well get you approved next time. 

Improve Your Business Plan

Traditional banks often require you to present your business plan, especially if you are applying for an SBA 7a loan, which has strict borrowing requirements. If you’re seeking a loan to expand and grow your business, you need to convince the lender that you are going to increase your revenue stream. This is where a business plan comes in handy. 

A detailed business plan tells a lender that you’ve done your research about the market your business operates in, why you believe your business has an edge on its competitors, and how you plan to make money. A convincing and detailed business plan can mean the difference between an approval or a rejection. You can find business plan templates online, and many of them are free. 

Take an Inventory of Your Assets

If your credit scores are borderline, a traditional bank or credit union may ask for a personal guarantee for your loan, which often means putting up collateral. Collateral can include any investment accounts you may have, personal items of high value or even the deeds to your house or car. Keep in mind that these assets can be seized in the event that you default on your loan payments.

Of course, putting up collateral presents a high risk to you, the borrower, but it does have potential rewards. Collateralized loans or business lines of credit can notch you a higher borrowing amount and lower interest rate, as well as cut down on fees and required balloon payments. In essence, collateral can dramatically cut the cost of capital on your loan. 

Try to Expunge Your Record

While it’s rare, small business owners may get rejected for a loan because many lenders want to do business with people of “high character.” This means that if you’ve made a mistake in the past and have been convicted of a crime, late on child support payments, or have an IRS tax lien on your finances, lenders will consider this a red flag and you may get rejected for a loan. If this is the case, you may want to speak to your attorney to see if you can get your record expunged, and get caught up on any child support payments or back taxes you may owe. 

Don’t Give Up

We all know the line made famous by The Godfather: “It’s not personal, it’s just business.” 

This is precisely the case when you’re turned down for a business loan. If you do get rejected, don’t take it personally, and don’t give up. All a loan rejection means is that you need to take steps in order to get approved next time so that you can get the funding you need to improve your small business. Follow the above outlined steps to improve your situation so that, next time, you can get the funding you need to enhance your small business. 

Vince Calio

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Best Business Loans for Startups

Financing, Manage Your Money
by Vince Calio15 minutes / August 14, 2023
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Can I get a business loan for my startup?

There are many ways to describe what it’s like to start a business: exciting, ambitious, and passionate, to name a few. Almost every small business owner would agree, however, that there’s one word they would never use – easy. For all types of businesses, one of the most difficult challenges for any new small business owner is obtaining capital to launch your new endeavor. After all, some 47% of small businesses that fail after two years do so because they run out of money.

Apart from new dentists and doctors’ offices, traditional banks generally don’t offer loans to brand-new businesses, so startup business owners must look elsewhere for funding. The good news is that there are business loans available for new business owners, but each carries a different interest rate, terms, and personal credit score requirements, so it’s important to get educated on the different sources of funding available. 

How to Qualify for a Startup Business Loan

Before you begin exploring the best business loans for a startup, take steps to make sure you qualify. This means that you need to check factors such as:

  • Your personal credit score. Much of your personal credit score (or FICO score) is determined by your debt repayment history, your debt-to-credit ratio, and how much outstanding debt you have compared to your income. As soon as you begin your application process for a small business loan, this is the first factor that lenders will look at. 

If you have less-than-stellar credit, some of the ways you can improve your FICO score are by making sure you are current on all of your credit cards; paying down as much of the outstanding balances as possible. It’s also crucial to check your credit report with the three major credit bureaus to get rid of any errors that may be on it. 

  • Your Repayment Plan. Ask your potential lender for a detailed repayment plan on the types of financing you’re considering. You can impress your lender by showing them a detailed plan of how you intend to meet your payment obligations. This could be in the form of a simple document demonstrating the income you believe your business will achieve and how you believe you will be able to handle the repayment terms. 
  • Potential collateral. Many private lenders will require collateral as a condition of approving the loan, especially for startup business owners with poor credit. If you own a house, have money in your personal savings, or own other items of high value, the lender may require that you put those up as collateral.
  • Your sales pitch. If you need a loan to start a business, or you need working capital to fund your new business, you’ll need to convince a lender that your business is viable as part of the application process. This means explaining to your potential lender why you believe your business will make money, who your market is, and what differentiates your small business from your competitors. Lenders will be impressed if you show them that you’ve done a thorough evaluation of your market and have a sound marketing plan to sell your products and services. If your business has been running for a short time, it would also help to show your potential lender your financial statements to demonstrate a strong cash flow.

Assess Your Financial Needs

Before considering a small business loan or other types of financing for your new venture, you need to itemize what you need to spend money on, and what the general costs are. This will give you an idea of how much money you need to borrow and the type of loan you should consider. Once you’ve come up with your unique idea and product offerings for your business, assess what you will need to spend money on to make it happen:

  1. Manufacturing and inventory. Whether your business is online or operates out of a brick-and-mortar location, it won’t get very far if you don’t have products to sell. Manufacturing your product and having enough inventory will cost money. It’s crucial that you realistically gauge the market and determine the amount of products or services that you expect to sell and figure out how much that will cost.
  2. Marketing strategies. Your great product or service won’t do you much good if potential customers don’t know about them. Determine who your target audience is and devise a marketing strategy to reach them. This may involve having to purchase marketing software that enables you to reach your potential customers via SMS, email, social media, and search engine optimization strategies. Determine what software you need and estimate the cost.
  3. A website. No matter what type of business you are running, having an online presence– even a rudimentary one – is crucial, as most consumers today begin their search for products and services online. Even if you use a website builder and hosting service such as Wix or Squarespace, there can be fees involved. Do your best to estimate the cost for this vital business component.
  4. Equipment/machinery. If you’re planning to launch a new restaurant, construction company, or any other small business that offers physical services, you’re going to need equipment to run your business. Assess what equipment you’re going to need and the costs.
  5. Rent money for a physical space. If your business will operate out of a physical location, shop around to determine the ideal location and price for your space, as well as the cost to design it.
  6. Outside contractors. There’s no shame in admitting that you can’t do something, and if you have the means to do so, contracting outside help for things like logo and website design and marketing could make your life a lot easier and greatly improve your business. These services are expensive, so shop around and guestimate the cost if you feel bringing on contractors is necessary.
  7. Employees. Whether you’re opening a plumbing business, small accounting firm, or construction company, you will probably need employees at some point. A small business loan can help you get started on payroll until your business is pulling in enough revenue to pay your employees.

Where to Get Start-up Business Loans

There are not many types of start-up loans available.  There are even less start-up loans for those with bad credit.  So, getting an unsecured loan for your startup business will be difficult but not impossible. While most traditional banks and many alternative lenders do not offer them, as many of them view startups as too risky, there are some options:

Startup Business Loan Options

  • Online Lenders. There are online lenders that specialize in giving loans to startup businesses, even to new small business owners with less than stellar FICO scores. These finance options can include term loans, lines of credit, and equipment financing. 

Drawbacks: Because they are taking on so much risk, these lenders often charge very high interest rates – in some cases as much as 30% – to new small business owners, depending on their FICO scores.

  • Personal Loans. Personal loans have become popular over the past decade as online lending has become more prevalent. They are often easy to apply for, have far lower requirements than a standard business loan, and funding is typically quick. They can be a good source of bridge financing to pay for the startup costs if your personal savings aren’t enough to cover everything.

Drawbacks: Personal loans usually don’t offer as much money as business loans, so you may not be able to borrow the amount that you need. Additionally, depending on your FICO score, the interest rate on a personal loan can be extremely high. 

  • SBA Loans. The SBA loan program offers two specific types of loans that new small businesses may be eligible for: the SBA Microloan and the SBA 504 Loan. These loans have much lower requirements than the popular SBA 7a loan and pay relatively small loan amounts to new businesses and offer much lower interest rates than online or personal lenders. They are typically offered through not-for-profit intermediaries, often called community development companies (CDCs), although some for-profit private lenders may offer these types of loans as well.  

Drawbacks: These loans are usually offered to small businesses that have been operating for at least six months, with some form of working capital foundation, so if you can somehow be in business for that long, the loan may be worth it. Additionally, CDCs and lenders often only provide business loans for minorities, those that operate in underserved communities, and veteran-owned businesses. The biggest potential drawback is that the amount you borrow may not be enough to cover your costs – while the maximum amount you can borrow for a microloan is $50,000, the average SBA microloan size in 2022 was a little more than $16,000.

  • Personal Credit Card. If you’re desperate for funding and have no alternative sources of capital, then your personal card gives you a line of credit to draw upon to fund any start-up expenses. Make sure to get receipts so you can separate your personal expenses from your business ones so that you can take advantage of business tax deductions. 

Drawbacks: Personal credit cards typically carry a much higher interest rate than a business loan. Plus, startup business costs are usually high, and this will cause you to draw down your available credit significantly. That, in turn, will affect your FICO score, as your credit utilization rate is a big factor when calculating your score among all three major credit bureaus. 

  • Home Equity Line of Credit (HELOC). A HELOC allows you to establish a line of credit using the equity in your home as collateral. You can use the money for large purchases, such as the cost of funding your new business. 

Drawbacks: This might not be an option for you if you recently bought your house, as most banks require you to own a certain amount of equity in your home to use this type of finance option. Also, when you borrow against the equity of your home and are somehow unable to repay the debt, you could risk losing your home. 

  • Friends and Family Loans. Hey, you can always remind your friends and family members that Michael Dell started Dell Computers with a $1,000 loan from his parents. Seriously, if you have family members and close friends who trust you and you’re possibly willing to share with them a piece of your future success, this is always an option.

Drawbacks: If you were a troublemaker as a kid or never paid back that $100 your friend spotted you back in the day, then asking your parents or close friends for a loan may not be an option, no matter how much begging you do. So, if you’re planning on asking, try to make amends with them beforehand.

What to do if You’re Declined

Rejection is always a bitter pill to swallow, but if you are turned down for a startup business loan, you shouldn’t see it as a failure, but as a valuable lesson. Lenders make money by giving loans and charging interest on them, so in most cases, they want to see your small business succeed. As such, if you are turned down, they will usually be happy to specify why they turned you down and give you advice on how to get approved next time. The most common reasons for getting turned down are credit score, lack of assets, and a poor business plan. The ways to improve this are:

Make sure you are caught up on your bills. Having at least six months’ worth of on-time payments toward your current debt will go a long way toward improving your FICO score.

Apply for new debt. This may sound counterintuitive, but a strong debt-to-credit ratio is a big part of your credit score. The more unused debt you have, the more favorably a lender will look upon you. 

Save money! Of course, this is easier said than done, but if you have savings and any other assets of value such as your house, lenders will see that you have potential collateral, thus making it easier for you to qualify for a loan.

Have a strong pitch! Improving your business plan to include careful market research will improve your chances of getting a loan. Some of the questions you need to answer are: What differentiates your products and services? How will your business turn a profit? Do you have a strong marketing plan? 

Other Financing  Options for Startups

If getting a startup loan isn’t an option, worry not, as there are avenues to explore to obtain capital for your new venture. 

  1. Crowdfunding. Over the past decade, crowdfunding has become a popular way to raise funds for start-up businesses. It is the practice of raising funds through popular crowdfunding websites. Setting up a crowdfunding campaign is relatively easy and typically done through a crowdfunding platform.  Once you’ve set up your account on the platform, write up a compelling description about your company and its products, and indicate the amount of money you are seeking to raise and how you plan to use it. To attract investors, your business plan and products must strike an emotional chord.  One of the biggest perks of crowdfunding is that you can retain full ownership of your business.  While equity crowdfunding is an option, you can also focus on handing out rewards – such as discounts, special product releases, or profit-sharing – to your investors. 
  2. Small Business Grants. There are several grants available for startups through both private entities and the federal government that could reward you with thousands of dollars in start-up cash, especially if you are launching a woman-owned, minority-owned, or veteran-owned business. 
  3. Small Business Credit Cards. Since there are limited business loan options available for startup businesses, you may want to consider applying for a business credit card as a temporary alternative. Business credit cards issued to startups will require a strong FICO score, which helps to mitigate the risk the card issuer is taking due to your lack of time in business. Like with any credit card, interest is only charged on the amount you use.  As an added bonus, business credit cards typically come with perks – such as cash-back rewards, travel points and discounts with select vendors – helping you save money at the same time. 
  4. Venture Capital. VC funds usually have the most stringent requirements, and only invest in companies that are in an industry with the potential for high-margin growth. To invest, VC managers will require a strong business plan, showing growth and revenue milestones you plan to hit and how you will accomplish them.  In return for investing VC managers may want high ownership stakes, a seat on the company board of directors, right of first refusal, and anti-dilution protection. VC funding is not easy to obtain.  There are hundreds to thousands of businesses vying for funding at any given time. To make their own selection process more seamless, most fund managers will only accept pitches through referrals.

Steps to Take Before Applying for a Startup Business Loan

Before you seek a loan to fund your startup, there are several steps you need to take first to set up and establish your new business. These include:

  1. Making sure that the federal government knows your business exists. Okay, this may sound strange, but it’s really not – in order for your business to operate, get a loan and take tax deductions, the IRS must know that it exists. That means that you need to obtain a federal Employee Identification Number (EIN) from the IRS. This is a number needed for the IRS to identify your business. You can apply for one on the IRS website.
  2. Registering your business. For tax reasons (and to also make sure your company officially exists), you should register your business within your state as a limited liability company (LLC), “doing business as” (DBA), or a corporation. Sole proprietors typically become LLCs or DBAs so that they can tie their business’ revenue with their personal incomes, which has tax benefits. Higher-margin small businesses that have multiple owners sometimes register as S corporations, which also have tax and legal benefits. Registration must be made in your state, and each state has slightly different requirements. Either a tax attorney or online legal companies such as legalzoom.com can assist you with this for a fee. 
  3. Creating a business plan. Small business lenders may ask for a business plan before approving you for a loan. A business plan is like a resume for your business. It defines your business, what makes it unique, and states why you believe it’s going to make money, among other things. You can find templates for business plans online, or if you have the means, you can hire someone to do it for you. 
  4. Getting your paperwork in order. Whenever you apply for a start-up loan it’s a good idea to get your paperwork in order BEFORE you start the application process. If you’re seeking to borrow for a startup business, lenders will probably want to see any financial statements you have at this point, your personal tax returns, and a business plan.

Hang in There

Creating a business from scratch is one of the most difficult – albeit rewarding – challenges that anyone can take on, and obtaining capital for your new venture may be the most difficult challenge early on. There are, however, borrowing opportunities and other sources of money that you can tap into besides your personal savings. Carefully evaluate your funding options to make sure you select the one that is right for your business. 

 

Vince Calio

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Should You Take Out a Business Loan? Consider this Checklist

Financing, Manage Your Money
by Vince Calio6 minutes / May 17, 2022
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small business loans kapitus lending

If your small business is ready to obtain financing, that means you should be in a great position – your sales are flowing, your earnings are consistent, and you’re ready to expand your business’ footprint. Before you do take out a business loan, however, it’s crucial that you decide first whether taking on debt is truly advantageous to your business, and which lending product is best to meet your goals.

Should You Take Out a Loan?

One of the most pressing questions you need to answer before taking on any new financing is: how well-equipped is your business to take on new debt? To answer this question, you should complete a comprehensive checklist regarding your business:

#1 Do I Even Qualify for a Loan?

Different types of loans require different qualifications, but you should first make sure that your business meets certain requirements from lenders. Your minimum FICO score should probably be in the 680 to 700 range for certain financing products such as a term loan, although alternative lenders such as Kapitus may require slightly lower scores, depending on which financing vehicle you are applying for.

Lenders will also want to see how strong your company’s business plan is; how long you’ve been in business; what your plans for growth are, and the consistency of your cash flow in order to gauge whether you have the ability to pay back the loan.

If you’re not sure whether you qualify, you should speak to a lending officer at the institution you are seeking to borrow from, who can walk you through the steps in which your business needs to take in order to qualify for a loan.

#2 Why Do You Need a Loan?

Ideally, you are seeking to borrow money to expand your business and increase revenue, and hopefully, that increased revenue will offset the cost of capital for your loan as well as enable you to make monthly loan payments.

As we all know, however, we’re currently not living in an ideal economic environment, as small businesses are still struggling to make ends meet in a turbulent economy. Fortunately, there are a variety of financing products to choose from that can provide much-needed cash for all sorts of reasons. Some of these are:

  • The development of a new product or service which you foresee increasing sales.
  • Opening a new office or facility.
  • An emergency such as a collapsed roof or crucial machinery breaking down in which you need emergency cash to keep your business in operation.
  • Getting immediate cash for invoices.
  • Increasing your inventory to meet high demand.
  • Meeting off-season expenses.
  • Purchasing new equipment.

Once you’ve decided the reason you need financing, you can examine several distinctly different financing products that can meet your needs.

#3 How Strong is Your Cash Flow?

After credit score and business longevity, lenders will want to see your business’ cash flow – the net balance of cash that’s moving in and out of your business on a regular basis. If you’re borrowing to finance the development of a new product, for example, and sales of that product don’t end up being as strong as you thought they would be, a lender will want to know if you’ll still be able to make monthly installment payments on the loan you took out. This is what a strong cash flow will indicate to them.

There are several ways to improve your cash flow if necessary – you may want to examine ways to cut unnecessary spending, optimize inventory management, hound customers to pay their invoices and improve your cash flow forecasting. Your loan approval could very well depend upon the strength of your cash flow.

#4 Is the Price Right?

Courtesy: CBS Television. No, you don’t have to be a contestant on The Price is Right, but you do shop around for the best prices in terms of cost of capital.

Anytime you borrow money, be it through a business credit card, a mortgage or a term loan, you are going to have to pay a cost of capital. This can be the interest rate associated with a term loan, the APR on a business credit card or line of credit, or the costs associated with invoice factoring or revenue-based financing. Whatever financing instrument you choose, it’s crucial that you ask the lender the total amount you will be paying back over time.

It’s also just as crucial to shop around for lenders and consider which ones may be offering the best terms, and which ones can offer you a quick turnaround.

Traditional banks often have more stringent borrowing requirements, while alternative lenders often are  more expensive but will typically offer a quicker turnaround time on your loan with fewer requirements.

Something else you should consider – the Fed has just hiked the overnight rate by a half percentage point – that’s after a quarter-point hike last month – so some loans are going to be even more expensive than they were at the beginning of the year.

#5 Are you Willing to put up Collateral?

Depending on your credit score and other factors, some lenders may require you to put up collateral or even a personal guarantee. Collateral would include the liquid assets of your business such as your equipment, business savings and/or investments and future invoices.

Some may even want you to give a personal guarantee that you’ll pay back the loan by putting up some of your own assets as collateral, such as your house or your personal investments, in case you default on the loan.

Putting up collateral may increase your risk in taking out a loan, but keep in mind that lenders really aren’t interested in seizing your assets – they would much rather see your business succeed and for you to pay back the loan in a financially healthy manner. Therefore, when you’re taking a loan, it’s imperative that you sit down with your lender and carefully go over the terms of collateral and the exact steps that will be taken should you default.

Carefully Weigh Your Options

Before you take out a business loan, it’s always a good idea to consider other ways to raise money besides going into debt. Crowdfunding, asking for outside investments, borrowing money from family are other options. If you do decide to take out a loan, carefully consider the above questions and decide which loan will help your business the most and which would be most cost-efficient.

Vince Calio

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The Best Business Loans for Franchise Purchases and Improvements

Financing, Manage Your Money
by Albert McKeon7 minutes / February 20, 2020
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business loans for franchise

Are you exploring business loans for franchise purposes? You’re likely bringing some of your own money to the table to finance your dream. However, that doesn’t mean that you won’t need help with other startup costs, future expansion or ongoing funds. You might be surprised at how many options there are in the marketplace. This guide will help get you up to speed on the most popular franchise financing options according to two main objectives: buying a first/additional/multiple franchises and funding existing franchise operations.

Get ready to feel better about your financing options for the next chapter in your entrepreneurial careers. Your franchise ownership goals are within reach.

Buying Your First/Additional/Multiple Franchise Locations

Whether you’ve got your eye on owning your part of a franchise or ready to expand your franchise footprint, you’ll need one of the many flexible-use business loans for franchises.

The three most popular types of franchise financing are:

  • Traditional loans
  • Small Administration (SBA) loans
  • Franchisor financing

Look at how each of these financing options can fit the needs specific to someone purchasing an initial franchise.

Traditional loans

When considering the different business loans for franchises, traditional business loans top the list. Proceeds can help purchase or expand franchise holdings.

Traditional loans are smart financing options for small business owners confident that they have the financials and good credit to qualify. With generous loan limits, highly competitive interest rates, and flexible terms, these loans will likely offer some of the best rates in the market. You’ll need to come to the table equipped with solid financials. The rigorous underwriting process is one of the reasons these loans typically offer the most competitive terms. Traditional loans might be an attractive option. Show three years of tax returns, a strong personal financial history and a good credit score. The lender will verify fund source you’re using for your down payment.

With traditional loans, your franchise choice could play a significant role in the approvals process. Lenders like to see big brand names with proven track records in the market. Franchises with few locations might hurt your application. These franchises haven’t worked in multiple markets and various economies. Yet, if you’re a new franchise owner, a traditional loan can use your personal credit and financial history to launch your new venture.

SBA 7(a) loans

The SBA 7(a) loan program is hands-down the most popular loan program. It’s a reliable option for financing franchise startup and expansion costs. When you use these types of business loans for franchises, you’ll find competitive rates and virtually unlimited use of funds. Loan Limits are generous, and flexible terms are perfect for a franchise on the rise.

The first step to qualify for an SBA (7a) loan is to make sure your franchise is listed in the SBA Franchise Directory. If they don’t list your franchise type, you can apply for participation in the directory (note: the SBA will require additional documentation).

Loan limits are up to $5 million and terms range from 10 to 25 years. Interest rates are generally in the single digits (7% to 9.5% is a good range to consider). Prospective borrowers will usually have to be in business for at least two years. This makes the SBA 7(a) loan a better match for existing franchise owners, or those purchasing a franchise in an industry where they have a proven careers track record. Lenders will use your credit score and business financials for qualification. While the approvals process isn’t speedy, you’re rewarded with some of the best rates and terms, aside from traditional loans.

The only limit to an SBA 7(a) loan is borrowers can’t use the funds to finance franchise or royalty fees. If you choose to go the SBA 7(a) route, make sure you earmark other funds for these startup costs.

Franchisor financing

Many of the nation’s leading franchises offer direct financing to entrepreneurs. Of course, they want to make it simple for owners to get up and running. This one-stop-shop approach is potentially perfect for those looking to open their first location, adding a location, or purchasing multiple locations at once.

While the rates might not be as competitive as traditional loans or the SBA 7(a) loan, there’s something to be said for a streamlined process. As you consider all the options for business loans for franchises, it’s worth it to speak to the franchise and see what options are available. Be sure to have your attorney or accountant review any financing options offered by the franchise. Then you can compare the terms between a traditional loan, SBA 7(a) loan and the franchise’s direct financing side-by-side.

Funding Ongoing Franchise Operations

You may find times where you need a cash infusion to help fuel operations and growth. The best business loans for franchise needs in these cases is the one that matches:

  • The reason you need the funds
  • How long you need to repay the funds
  • How much you need to borrow

Here are three financing options franchises can use to keep operations running smoothly and make specific improvements.

Traditional business loans

If you know you need a fixed amount of cash for an upcoming franchise improvement or expansion expense, a traditional business loan can help. With fixed terms and rates, small business owners can fund franchise expenses with a predictable impact on their monthly budget.

Repayment terms are often flexible, including payment frequencies based on your current cash flow. Traditional loans have stringent qualification guidelines, and not all businesses can qualify with ease. You’ll need to have existing operations with a proven balance sheet, a plan, and your financials in order.

Lines of credit

If you’re looking for a more flexible way to access the cash your franchise needs, a line of credit might be the ideal tool.

Lines of credit can be used for nearly every purpose imaginable. You can draw as much or as little as needed–and only pay interest on the funds drawn. Once you pay it back, your credit line is once again fully available for use. There’s no need to go through the qualification process again.

For businesses that may not qualify for a traditional loan, lines of credit can fill that financing gap. Credit scores aren’t weighed as heavily in the approval process for most lines of credit, either. These features combined make lines of credit ideal to fund everything from cash flow gaps to seasonal inventory ramp-ups. The sky’s the limit.

SBA 504/CDC loans

While the SBA 7(a) loan is an ideal fit for initial or additional franchise purchases, you’ll need a different SBA loan type for funding ongoing business concerns.

The SBA 504/CDC loan has a narrow scope of use. Funds must be used for acquiring, renovating, or improving real estate or equipment. A borrower’s franchise location must also be U.S.-based. This type of loan can help fund making improvements to franchise real estate, buying real estate, or even upgrading heavy equipment to speed operations.

As with the SBA 7(a) loan, your franchise needs to be listed in the SBA Franchise Directory to be eligible. While these loans are slower to fund than traditional bank loans and lines of credit, you’ll likely be rewarded with some of the best interest rates. With all of the options for business loans for franchises, there’s one out there that makes perfect sense for your financials, credit and goals. And, if you’re still trying to determine the next steps in your franchise financing plans, you can always reach out to a loan officer to discuss.

Albert McKeon

Albert McKeon

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Small Business Loan Application Checklist | Updated for 2023

Financing, Manage Your Money
by Albert McKeon6 minutes / February 18, 2020
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Building and running a small business is hard. It takes conviction, leadership, sound management and, every so often, a much-needed injection of financing. In both good and lean times businesses are often faced with the decision to pursue some type of financing. However, applying for and acquiring small business loans and alternate financing can often be daunting – even if you’ve done it before. And traditional lenders do not make that experience easy.

The good news is that getting financing doesn’t have to be this hard. We help thousands of small businesses everyday and want to share secrets of getting good financing options quickly. So, we have compiled a simple checklist of actions you can take to make the process fast, simple and easy.

However, as you get ready to apply for a small business loan, you should consider the following questions carefully to be sure you are not surprised by any unforeseen requests or adverse decisions from lenders.

Six questions every business must ask in 2020 before applying for a small business loan | Download PDF

1. Should you apply for a small business loan?

While a small business loan is a great way to reduce the pressure on cash flows, you could have viable alternatives for relieving cash flow crunch like selling debt owed to your business and renegotiating contracts to allow for longer payment terms. Also, make sure you have considered all alternate sources of financing including friends and family.

2. Is a small business loan good for your business?

Understand the effect of repayment of small business loan on your cash flow. A loan does not change the fundamental working of the business. It strengthens a fundamentally sound business and quickly breaks a business that is fundamentally unsound.

3. Can you qualify for a business grant?

Unlike loans, you don’t have to pay back grants. Before applying for a small business loan, see if you qualify for a federal or private small business grant. However, grants can be highly competitive and may not fit your financial time horizon.

 4. What types of small business loans are there?

There are over a dozen types of small business loans and alternative financing options for small business. The most popular options are government-backed SBA loans, revenue-based financing and factoring. Download this eGuide to learn more about different types of small business financing.

5. When should you apply for a small business loan?

Apply only once you have determined that a business loan will help strengthen your business, and you understand the different types of financing options like Small Business Loans, Revenue Based Financing, Factoring, and Equipment Financing. Each of these options have unique requirements so make sure you understand them well before speaking with a lender.

6. Should you work with a small business loan broker?

Brokers are a great resource to get offers from multiple lenders. However, many online marketplaces like Kapitus, will get you offers from multiple lenders without the additional broker fee which is borne by the borrower.

Small Business Loan Application Checklist| Download PDF

1. Run a quick cash flow analysis on your business account

Cash flows are one of the primary indicators that lenders use to understand the health of your business. Showing 3 to 6 months of positive cash flow can get you approved faster. It can even get you better financing terms for your small business loan. You can learn more about cash flows and ways to improve them in “How to Prepare Your Small Business for Cash Flow Needs.”

2. Collect at least 3 months of bank statements

Your business accounts are another good indicator of your company’s financial health. Generally, lenders want to see a positive daily balance on your bank statements. Remember, a well managed cash flow will directly improve your bank accounts.

3. Identify unusually large deposits to your bank accounts and gather supporting documents to help explain them

While presence of unusually large deposits can delay finalization of loans, they are not necessarily bad. Many businesses, like construction companies, can easily explain their presence on the bank statements. Some businesses understandably have large swings in deposits and credits to their account. If your business is like that, you can expedite your loan application process and get really good terms on your small business loan by providing a copy of your account receivables and future contracts.

4. Get a copy of your free credit report and make sure there are no red flags

A strong personal credit goes a long way to assure any lender about the fiscal responsibility of the person running the business. You can get a free copy of your credit report from annualcreditreport.com. If you find any incorrect information on your credit report, contact each credit reporting agency (Experian, Transunion and Equifax) immediately to correct the issue. Keep in mind that while small delinquencies are understandable, lenders are uncomfortable with statements that show delinquencies on child support or recently dismissed (not discharged) bankruptcies.

5. Reduce the number of lenders to whom you owe money

Too many lenders pulling money from the business can create severe strain on its cash flow. Lenders want to know that the money they provide will help grow your business and not put additional strain on its daily operations. You may want to wait to finish your current loan obligations before going back to the market to raise more capital.

6. Resolve any open tax liens

Unresolved open tax liens can hurt your ability to obtain financing. If possible, try to get a payment plan on any open tax lien. A payment plan on a tax lien is far better than an open unresolved tax lien.

7. Get three business references

Trade references help to establish authenticity and credibility of your business. If you rent commercial space for your business, make sure that the landlord is one of your references.

8. Have tax statements handy when applying for a large sum

Lastly, businesses contemplating borrowing large sums over $75,000 should get a copy of their last year tax statement and business financial statements.

Obtaining small business loans doesn’t have to be a daunting process. Use this checklist before applying for a business loan or alternate financing and get the funds your business deserves.

Albert McKeon

Albert McKeon

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Where Businesses Can Find Small Loans

Financing, Manage Your Money
by Liz Froment5 minutes / November 7, 2019
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choosing small loans for your small business

There may be several financial institutions in your area that offer business bank accounts, but you cannot determine the “best choice” based on the bank’s age, size, or advertising claims. Ultimately, finding the best business bank account for your business starts with identifying specifically what you want to achieve with your banking relationship — now and in the future.

The questions below may help determine which bank can best support both the financial needs of your business, along with your longer term business goals.

Does the bank specialize in businesses like yours?

Not all business bank accounts are the right fit for every type of business. Your business may share commonalities with others in size, region, years in business, and annual revenue, but the challenges and opportunities that come with your business are unique. As you consider different banks, explore what types of businesses they serve. Do they offer solutions geared toward your industry? How familiar are they with your local market? Are they well-versed in SBA loans? The business relationship you have with your bank can influence your ability to reach profitability, maintain adequate cash flow and expand to establish a unique point of differentiation from competitors.

  • If your business is small with little-to-no plans to grow, in start-up mode, or is seasonal in nature, you may not know the average monthly balance you’ll be able to maintain, or the payment tools you’ll need to purchase goods from vendors, and accept payments from customers. Narrow your search to banks that offer business checking accounts with a low (or no) monthly minimum balances and fees, debit cards, online banking, fee-free wire transfers and unlimited incoming deposits.
  • If your business is well-established, in growth mode or operates internationally, consider banks that have an extensive footprint (around the country or world), offer cash management solutions like lockbox, remote deposit capture and fraud prevention for checks and payments, and/or specialize in high-value or cross-border transactions.

Does the bank offer tools beyond traditional accounts?

Javelin Strategy & Research reports that digital solutions and payments services for small businesses have “…lagged significantly behind consumer and commercial banking.” As a result, many small business owners may be hindered by a lack of access to the technology they need to effectively run their business. A bank that offers additional business tools may provide you turnkey solutions to run your business — including the ability to process card payments, offer gift cards, or manage loyalty programs and inventory. Know that having digital and mobile access to your business bank account is a top priority? Narrow your search for a bank only to those brands who are equipped to deliver all of your needs virtually. If you’ll rely on your bank for more than traditional financial services, limit your search to those that offer value-added tools.

Does the bank offer the ability to build credit?

Building a formal business credit history can document your businesses financial responsibility, and could work to your advantage if you intend to bring in business investors, partners, or want to sell your business. Not all banks offer credit cards or similar products for business clients; those that do may be more willing to issue credit to a business customer who has an established relationship with it.

Does the bank assign a relationship manager?

The best business bank accounts establish relationships, much like a consultative relationship between the client and a bank representative. If a personal touch is important to you, look for a business bank account that provides a relationship manager who is vested in understanding your business, and how the bank can help support it. If you’d prefer to handle most of your businesses’ financials online, however, a relationship-based model may not be necessary.

If you do opt for a bank that assigns a relationship manager to your account, consider the level of authority and expertise the person who will support your business holds, and whether the business bank relationship will suit your need for a minimum of 18 months. Meet with relationship managers at a few banks to gain a sense of how they interact with business clients, and to gauge whether their approach aligns with your expectations.

Is the bank preparing for the future?

Technology is changing business payments at a rapid pace, and banking is increasingly moving to a digital environment, allowing for faster processing times. Not all banks are equally invested in keeping up with the technology changes, particularly when it comes to meeting the demands of small business clients. While many banks now offer digital conveniences like person to person payments for consumers, not all have the capability to offer a similar services to business customers. Smaller banks or credit unions may be more flexible with fees, compared to larger banks, but not all have the resources to support the latest banking technology.

Research the business banking solutions that a variety of banks offer; compare what is available in the broader market, and from each specific bank. The bank you choose should offer the benefits most important to you, support the financial needs of your business, and be investing in technology and infrastructure enabling them to be your business banking provider for the long haul.

Liz Froment

Liz Froment

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6 Business Alternatives for Bank Loans and When They Make Sense

Financing, Manage Your Money
by [email protected]6 minutes / July 22, 2019
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Need financing for your business but can’t qualify at a bank? There are various financing alternatives to keep your operations running.

Borrowing money is an essential part of building a small business. But when you need a loan, traditional lenders like the bank might not be an option. They tend to have strict small business lending standards. For example, you need established business credit, collateral and detailed financial statements for bank loan approval. This is a difficult hurdle for companies that have only been around for a couple years.  Fortunately, as a business owner, you have other options, with a number of business alternatives for bank loans on the market today.

These alternative options can be your financing lifeline until you build enough of a financial track record to qualify for more traditional financial products.

LET’S TAKE A LOOK AT THESE BUSINESS ALTERNATIVES FOR BANK LOANS AND WHEN THEY MAKE THE MOST SENSE.

1 – Online Loans

Banks aren’t the only ones lending money. Alternative and online lenders are also a quality source of small business financing. They offer stand-alone cash flow loans that you can invest into your business and spend however you choose. If you want more flexibility, you could also open a line of credit.  A line of credit lets you borrow, pay the money back and re-borrow again as many times as you want.

It’s easier to qualify for loans from alternative lenders because their requirements are not as strict as with banks. Another advantage is you often don’t have to secure the loan with your future business revenue or other collateral. However, your business will need to meet some standards like stable revenue and a good business plan for how you will use the loan proceeds.

Best fit for: A business with stable revenue looking to borrow cash quickly, without putting up collateral.

2 – SBA Loans

Another way to borrow is through the Small Business Association. This government organization assists small business owners and one of their services is to help them qualify for loans. The SBA doesn’t actually lend money. Instead they agree to back a certain percentage of the loan, guaranteeing repayment to the lender. This makes the lenders more likely to accept your application.

SBA loans can be a great tool provided you can qualify. The process does take time and you’ll need to submit, at minimum, similar documents that you would include as part of a bank loan application – such as a business plan, bank statements and your credit report.

Understanding the SBA system can improve your chances of qualifying so be sure to work with a lender that regularly works with these types of loans.

Best fit for: A business that can meet the SBA standards for a loan and also knows a lender that understands the application process.

3 – Equipment Financing

If your small business needs money specifically to buy a new piece of equipment or machinery, then equipment financing could be the answer. These small business loans can only be used to buy an asset, which also counts as the loan’s collateral. This makes it easier to qualify because if you end up not paying off the debt, the lender can take back the equipment as repayment.

With this type of financing, you can often buy new equipment with no money down but you’ll still receive the full tax break for the business investment, as if you bought the equipment with cash. You can also set up the financing as a lease which would let you replace the equipment earlier with new versions as they come out.

Best fit for: Buying or leasing new equipment for your business.

4 – Purchase Order Financing

A lack of cash can put even thriving businesses in trouble. 52% of small business owners had to forgo a project or sales worth $10,000 because of insufficient cash, according to an Intuit Quickbooks survey (slide 2). If you’ve got a project lined up but need some extra money to make it happen, purchase order financing could be the answer.

These short-term loans cover up to 100% of your supplier costs if you can show that you’ve got an order that will turn things around. Once you make the sale, the lender will deduct their fees from the proceeds. That way you still fulfill your order without taking on any extra debt. And since you can prove that you’ll be able to pay the money back quickly this financing is easier to qualify for. You just need to prove the upcoming purchase order.

Best fit for: When you’ve almost completed a sale and need a quick cash infusion to reach the finish line.

5 – Invoice Factoring

After you make a sale, your job still isn’t done because you you’ll need to collect payment. This can take between 30 to 90 days, depending on your payment terms.  And, as many know, it could take even longer when customers miss payment deadlines.  Not to mention there’s always the risk they don’t pay.

If your invoices are piling up and you need cash, invoice factoring could be the solution. You transfer over an unpaid invoice to a financing company, called the factor, and they’ll give you an advance on the payment.

From there, the factor takes over collecting from your clients. Once they get paid, they’ll give you the rest of the invoice amount minus their fee, which could be as little as 1.5% of the invoice amount.

Best fit for: A business with unpaid client invoices that wants to improve cash flow.

6 – Revenue Based Financing

Revenue based financing is the last of our business alternatives for bank loans. These loans have a simplified and fast application process, a great solution if your business needs money now. Lenders can approve this financing quickly because they just look at your historic revenue and how long you’ve been in business. They use this to forecast your future cash flow.

Based on that, they’ll give you a lump sum of cash. The lender will then collect a set percentage of your future sales on a daily or weekly basis.

Best fit for: A business with a proven history of revenue that needs money but does not want to go through a lengthy loan application process.

Don’t let a bank loan rejection discourage you from raising the money your business needs. As you can see, there are plenty of alternatives. If you have any questions to figure out which of these solutions is the right fit, reach out to a loan specialist today.

wrivera@kapitus.com

[email protected]

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