Qualifying for a Business Loan
Small businesses are commonly faced with the issue of raising capital. Applying for a business loan can be a complicated and intimidating task, but taking time to properly inform yourself of the lending basics will save you time and frustration.
The first step in the loan process begins with you setting up an appointment with a business consultant at the Northeast/Texarkana SBDC to discuss your options. The consultations are confidential and there is no cost to you. Consultants at the SBDC are seasoned experts that can help you fine-tune your business plan, identify sources of financing and develop a loan package.
Your SBDC business consultant will ask you questions to assess your business for the following issues. These problems can potentially hinder your ability to obtain a loan.
- Poor credit history
- Negative cash flow
- Absence of down payment
- Inexperienced management
- Lack of a solid case built for marketing product/service
- No financial statements
- No business plan
Work with your SBDC consultant to determine how you can address the complications listed above.
Types of Loans
Essentially there are two types of loans: term loans and lines of credits.
Term loans are the most common general purpose loan. Business owners typically use term loans to pay for working capital, expansion, refinancing, and acquisitions. You'll make monthly payments on this type of loan over a term based on the expected lifespan of the assets you're buying.
Lines of credit are flexible business loans that are typically established to ensure against cash flow issues. Instead of receiving a check for the full amount of the loan, your lender allows you to borrow up to a certain amount per year. Essentially, they set up a fund where you take out the money in increments as you need it. Although convenient, this type of loan can be expensive to repay if any payments are missed. Lines of credit are designed to help you cover temporary cash flow problems and should not be used to fund permanent or significant improvements to your business.
Small Business Administration (SBA) Guarantee Loan Program
If your loan application is rejected by a commercial lending agency, then your SBDC consultant may advise you to consider applying for a loan with a SBA guarantee. Banks and other lending institutions offer a number of SBA guaranteed loan programs to assist small businesses. Note that the SBA itself does not make business loans, it guarantees loans made to small businesses by private banks and other institutions. The SBA guarantee is a promise to pay a portion of the loan back to the bank in case a business owner defaults on the loan. A guarantee reduces the lender's risk which allows the lender to make loans to business owners who do not qualify for traditional loans.Below is a summary of the SBA guarantee loan programs.
7(a) Loan Program:This is the SBA’s primary and most flexible loan program, with financing guaranteed for a variety of general business purposes. It is designed for startup and existing small businesses, and is delivered through commercial lending institutions.
CDC/504 Loan Program:This program provides long-term, fixed-rate financing to acquire fixed assets (such as real estate or equipment) for expansion or modernization. It is designed for small businesses requiring “brick and mortar” financing, and is delivered by CDCs (Certified Development Companies)—private, nonprofit corporations set up to contribute to the economic development of their communities.
Micro-Loan Program:This program provides small (up to $35,000) short-term loans for working capital or to procure inventory, supplies, furniture, fixtures, machinery and/or equipment.
Your Loan Package
Documents You Will Need
The best way to improve your chances of approval is to create a loan package. Your SBDC business consultant will need you to gather the following information:
- Company name, names of owners and contact information.
- Loan purpose: explanation of what the loan will be used for and why it is needed.
- Loan amount: the exact figure you need to borrow.
- Description of business: history and nature of the business, its age, number of employees and current business assets.
- Organization structure: details on your company's legal structure.
- Owner background: include resume (or brief description) including business experience for each principal of the business.
- Business plan: provide your SBDC consultant with a copy of your business plan. If you don’t yet have a business plan, then your SBDC consultant can provide you with guidance for getting started.
- Customer profile: customer description and explanation how your business can satisfy their needs.
- Products: describe your company's products.
- Competition: identify your competitors and explain your company’s position in the marketplace.
- Financial statements: balance sheets and income statements for the past three years. If you are a new business, your SBDC consultant can provide assistance in developing financial projections.
- Personal financial statements: personal tax reports for you and other owners of the business.
- Collateral: assets that you're willing to secure as collateral for the loan.
How Your Lender Thinks
Truth be told, your lender is primarily concerned about repayment. The financial institution you decide to work with will exercise extreme care in only approving applications that clearly demonstrate the company's ability to repay the loan. Below are a list of factors commonly known as the 5 C’s of lending that your bank will consider.
The 5 C’s of Lending
Credit: You must have a good score and stable history. Lenders want to see that you and your business have a history of paying bills and loans as agreed and on time. Lenders will review your personal credit reports as well as those for your company.
Capacity: Your ability to repay the loan. The lender will want to see that your business is earning enough income to repay the monthly payment in addition to covering your existing operating expenses.
Capital: The money going into the business. Typically, your lender will not finance 100 percent of your business. You must demonstrate that you have invested savings or personal equity in your business totaling at least 20 to 50 percent of the loan you are requesting.
Collateral: The assets you own that secure the loan. Your lender will look for assets that have resell values that meet or exceed the amount of the loan.
Character: Your reputation, integrity and trustworthiness. Your lender will review your credit history, personal background, and borrowing behavior to determine if you have the reliability to repay the loan.
Common Questions Your Banker Will Ask
After you’ve developed a loan package with your SBDC consultant you will be prepared to answer the following questions:
- How much do you want to borrow?How will you use that money?
- How will you repay the loan?
- How long will it take you to repay it?
- What collateral do you have to offer?
- How much are you investing in your business?
- What experience and management skills do you or your team possess?
If you’ve decided you are ready apply for a loan, then be sure to contact the Northeast/Texarkana SBDC to have an experienced consultant guide you through the loan process. Ultimately, taking the time to put extra care and effort to properly assemble your loan package will not only strengthen the likelihood of being approved for the business loan, it can also be a great opportunity for you to analyze the health of your company.
Ready to start the loan process? Call the Northeast/Texarkana SBDC at (903) 434-8237 now to set up an appointment with a business consultant. The business consultation is confidential and there is no charge to you.