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Funding Your Business: Small Business Loan Options & How To Qualify

Today there are so many options for business loans that the research process can feel more overwhelming than paying back the actual loan. And on the surface, most of these options don’t seem too different. From traditional financial institutions to online lenders, you’ll want to do your homework to research interest rates, required credit scores, and the approval process.  These tips should be a primer as you narrow down your options.

Types of Business Financing

Traditional Bank Loan
A traditional term loan is financing provided a bank that provides financing that is paid back incrementally over a fixed period of term. The term associated with a bank loan is generally set between 1-25 years (depending upon use) with repayments made monthly. This could be a great option that yields lower interest rates over a long period of time and the approval process is quick.1

Short Term Loan
A short-term business loan provides a lump sum upfront to a borrower and has a repayment period ranging from three months to three years. The short repayment period means this type of financing is best to manage an immediate cash flow gap, an emergency or immediate financing and investment needs.

Commercial Real Estate Loan
As its name implies, commercial real estate loans are designed for businesses who are looking to purchase commercial or income-producing properties. These loans have a fixed or variable interest rate and terms are usually from 7 to 10 years. The loan amounts start at $50,000. Thinking of buying commercial real estate like office spaces or an apartment complex? You’ll likely need a commercial real estate loan to help you make the purchase.  It is also ideal for owner-occupied real estate and preserving cash flow on construction projects.

SBA Loans
An SBA loan is a small-business loan offered by banks and online lenders, and partly guaranteed by the government. Doing your research first will help you find a lender who participates with the SBA. Through the small business administration, the government guarantees payment of a substantial part of the business loan. There are multiple types of SBA loans — each with its own terms and conditions. The best SBA loan for you will depend on what you plan to use the funding for. Some examples include:
1. SBA 79a) loan- $250K- $5M for buildout, working capital and equipment lease.
2. SBA 504 Loan- $250K-$10M for real estate purchase
3.SBA SLA Program- $50K-$250K for working capital 

Business Line of Credit
A popular type of loan for small-business owners is the line-of-credit loan. In fact, it’s probably the one permanent loan arrangement every business owner should have with their banker since it protects the business from emergencies and stalled cash flow. Line-of-credit loans are intended for purchases of inventory and payment of operating costs for working capital and business cycle needs. They’re not intended for purchases of equipment or real estate.

Merchant Cash Advances
Merchant cash advances provide small businesses with an alternative from traditional bank loans. Business owners receive funds as a lump sum upfront from a merchant cash advance provider and repay the advance with a percentage of the business’s sales.  This option is more expensive—with higher interest rates than some other options. Yet, it’s a good way to take advantage of a short-term opportunity that requires fast cash.

Equipment Financing 
An equipment financing loan can be structured as a term loan, line of credit, or a combination of the two types of loans. It is typically used by small businesses looking to preserve cash by taking the cost of the equipment and spreading it out in equal payments. Equipment loans can be used to replace existing equipment, refinance equipment, or to purchase new equipment as your small business grows. 

How to Prepare Prior To Applying for Business Loans?
In most cases, all applicants require a bank account and a banking reference.  You will want to have on hand qualifying documents such as:

  • Business and personal tax returns.
  • Business and personal bank statements.
  • Business financial statements.
  • Business legal documents (e.g., articles of incorporation, commercial lease, franchise agreement).
  • Business plan.
  • Driver’s license/SS#
  • Proof of address

What Financing Factors do Lenders Consider?

You may have heard of the 5 Cs of credit. Many business owners ask, “What will the bank look for to loan my business money?”  It truly boils down to a  credit score of 650 or higher & minimum 20% ownership in the business. Understanding the 5 C’s of Credit will help you better prepare:

Your credit score is a key factor in determining character, as it’s the track record you’ve established while managing credit and making payments over time. Your credit report is primarily a detailed list of your credit history including the names of lenders that have extended credit to you, types of credit you have, your payment history, and more.

A lender wants to be sure that you have the capacity to make the payments on your loan. Lenders will look at the historical and projected financial performance of your business. To be considered creditworthy, your business needs sufficient cash flow to support its debts and obligations.

This refers to how much money you’ve put back into your business.  Bankers want to see that you have a financial commitment and that you’ve put yourself at risk in your own company. How you capitalize your business can have long-term effects on your company’s success.

The nature of the collateral is often predetermined by the loan type. Collateral is an asset that a lender accepts as security for a loan. If the business owner borrows money and defaults on the loan payments, the lender can seize the collateral and resell it to recoup the losses.

The conditions refer to economic conditions and how it affects your industry.  The banker will evaluate the current economic climate and if there could be any potential near-term negative impact to your company.

Maintain Banking Relationships:
Take the time to cultivate banking relationships that can be leveraged when opportunities or threats confront your business. The relationship you develop with your business banker should go far beyond a loan and a checking account. Your banker can provide you with advice, answer your finance questions, and help you find the best financing options to fit your specific needs.

When it comes to running a business, having trusted partnerships is essential. The business tax planning and preparing professionals at Jeanine Hemingway, CAP can be an integral part of helping you strategize ways to grow your business, reach financial goals, and minimize your tax liability.