As a respected professional in the Financial Industry I’d like to lay out some footing on what you need to know about business loans. My current position is with an international financial institution and I manage the Retail Outbound Sales and Business Outbound Sales Departments. My goal is to help you obtain your goal of determining what type of loan you are looking for, what do you qualify for, what information you will need to apply, and how long it will take to get your loan.
The first determining factor when looking for a business loan is how long the business has been established under current ownership. Current ownership is key. Generally most creditors look for a minimum of two years in business to extend credit to a business. There are programs in place for start up businesses as well. If you recently acquired a business or are looking to purchase an existing business; most lenders will still categorize you as a start up business.
When extending credit to a business, lenders will look at several areas to determine approval. The essentials to an approval rely on: ability to repay, collateral, and credit history. The ability to repay looks at your current debts and current income as well as your proposed debts and proposed income. The bank or lender needs to know they will receive payment on who they lend to. Collateral can be any number of things. Collateral can be a property, a piece of equipment, inventory, accounts receivables, etc. Depending on type of collateral used the lender will decide what percentage they will lend up to. Last but certainly not least, is credit. Both the business and personal credit history will be looked at to determine approval.
What is needed at time of application? Most lenders will require a completed business application, two years personal taxes for each owner who holds 20% or more ownership, verification of business ownership, two years business taxes (if applicable), and verification of assessed value of collateral. Some lenders do offer unsecured loans/lines of credit that does not require collateral. In this situation, guidelines are stricter as far as ability to repay and credit. There are separate guidelines for start up businesses.
When looking to establish a start up business, many financial institutions will recommend looking at the SBA Programs available. The SBA (Small Business Administration) is backed by the Federal Government. It is not the only source for start up businesses, but it is a good place to start. The SBA website can provide you with a list of SBA approved lenders. The SBA gives you tips, examples, and a list of locations where you can prepare your documents needed to start an SBA loan. Most lenders recommend or require a Small Business Development Center (SBCD) to sign off on prospective start up businesses.
When looking at doing start up a loan through the SBA you will need the same documentation as listed above. However, you will also need a SBDC approved business plan, a minimum of 2 years projections, and they look for you to invest into the business (generally a minimum of 25%). What is all this you ask? A business plan is going into detail what is your experience in the business you want to start, what is your competition, are you expanding, what market are you going to work, etc. The projections want to know how much supplies are going to cost, how much are you selling your product for and how much you plan on selling, are you going to pay for employees, rent, etc. Your personal investment is important. If you are not willing to invest your money into your business why should they? Don’t worry; the SBDC will assist you in completing these required items. Most of their programs are free or have a nominal fee.
Once your bank or lender has received all the documentation an approval, decline, or counter offer will be recommended. An approval is just like it sounds. You have been approved for the amount you have requested. A decline is when you do not meet the requirement a bank or lender requires. Sometimes, a decline can be due to not receiving requested documentation in the time requested. Make sure to ask what you are being declined for. A counter offer can come in many forms. A counter offer may be that you have requested a loan of fifty thousand but only qualify for thirty-five thousand. It could mean that you originally wanted to use a piece of equipment for collateral but the piece of equipment does not cover the amount requested. When receiving a counter offer or a decline find out why and see if there is something else you can provide to change the decision. If your lender says no; trust them. They are the professionals.
Depending on how long the business has been established, how much you are applying for, and what you are using for collateral will determine the time it takes to make a decision. Some programs take months to complete and some take days. Talk to your lender or banker and get a timeline on how long the application process takes, how long does underwriting and documentation take, and when the loan will be available if approved. You need to ask these questions up front. Most lenders will let you know upon application but don’t be afraid to ask.
How much will a loan cost you, and what is your rate? Before closing your loan, you need to know all fees, rates, payments, and terms? Does the line of credit have an annual fee or a pre-payment fee? If yes, for how long? Most business loans do have an up front fee generally around $150. Depending on the type of loan additional fees may apply such as title search or UCC filing. Pre-payment or Early Cancellation fees can vary from 1 year to 5 years and can be a set amount of a percentage. Be sure to know what you’re paying for. Rates in today’s market vary by product. Please see below for examples:
2002-2009 Business Vehicle Loan 6.75% to 10.55%
Business Asset Secured Loan 7.25% to 8.55%
CD/Saving/Secured Business Loan 2.5% to 3% over current rate on CD
Business Equity Loan 6.99% to 7.74%
Business Asset Secured Line *WSJ + 1.5% to 2%
Unsecured Business Line *WSJ + 4%
CD/Saving/Secured Business Line *WSJ + 0.50%
Business Equity Line *WSJ -0.25 to +0.50
For more information about what you need know about business loan do some research on the SBA, visit a local bank, or talk to your local business owners. All three are trusted resources that are at your fingertips. Don’t ask just one. Do your homework, and good luck with your business loan search.
*WSJ = Wall Street Journal Prime Rate