Small Business Funding: The Ultimate Guide
Orange County Small business funding help millions of small business owners and their business gain ground, help businesses before/after startup until its expansion on a competitive market like the US.
In this article, we’re going to explain the difference between governments guaranteed small business loans, the named SBA loans, and the traditional small business loan or merely bank small business loan and also how to proceed for getting one.
What is the difference between small business administration (government guarantee) loans and traditional business loans?
A traditional small business funding loan is solely the bank’s risk and subject to Bank lending guidelines. An SBA loan (government guaranteed loan) is a business loan that splits the risk between the Bank and the SBA, which guarantees a portion of those loans; SBA loans are subject to the lending guidelines of both the SBA and Bank.
Small business administration loans (SBA loans)
The U.S. Small Business Administration (SBA) is an agency of the federal government established in 1953 to assist Small Business Enterprises with Loans Guaranty; it is essentially an insurance company for loans given by banks to guarantee loans to small business owners who just do not meet level of requirement major that banks use to approve a business loan.
Small businesses are viewed for US government as an engine of our economy, the government created this mechanism in order to help entrepreneurs to get funding but unfortunately, many small business owners consider this lending process as complicated and frustrating.
The Government Small Business Loans consist of putting your business within the reach of looking for a decent location, build a customer base followed by all the cash flow problems before your business takes root and gains ground. The beginning of a business is crucial because it’s when you gain or lose market credibility. If you disappoint your customers, they may not give you a second chance.
If you are starting a new business, Make sure you have checked out the many existing support organizations in the country to provide assistance or represent you as a financial adviser, and also if for some reason your business gets off to a rocky start, and you believe you can recover but need further assistance to make it happen, you can contact www.score.org
How Can SBA Loans help your business?
Lenders are in the market to make money and they are almost reluctant to issue loans to anyone who does not have a strong credit report and financial history. This is not the case for government small business loans. Of course, a decent credit report is important, and you will have to follow the guidelines for the repayment period and the interest rate set by the government, but usually, the interest rates charged by the government are lower than what you could get from any lenders.
Please pause and read the motivational story bellow; sung by a successful businessman to you, business owner; in order to encourage you and get you into the success by using the government (SBA) loan program.
“Founded in 1948, Robert Chapman Kocian has owned and operated the Auto Bolt Company since 2005. Robert, who has more than 28 years of experience in the fastener industry, has led the company’s resurgence and growth. Just a year after Robert acquired the company, it received a $372,000 SBA 504 loan from Certified Development Company Growth Capital Corp., which was the first of several SBA loans that have allowed Auto Bolt to realize sustained growth. In the last 5 years, the company has received six SBA 504 loans to purchase a new 100,000-square foot industrial building and acquire manufacturing equipment. The company also received a $140,000 SBA Community Advantage Loan in 2014, which provided permanent working capital. Auto Bolt’s workforce has grown more than 35 percent, and it now employs upward of 60 employees. In addition, revenues are up more than 55 percent in the last 4 years. The company has provided an important economic effect to the local community. It has used lender partnerships that encourage and support comprehensive approaches to economic development”
This kind of story is exactly what the SBA and your local government expect from a business owner and its small business, as long as your business demonstrate good performance, help to develop your community, show high organization and a strong commitment to repaying your loan, SBA will always keep the door open for you and your business.
The biggest challenge now is getting small business owners into these loan programs; many banks do not find the government loans attractive because of its low profitability potential and actually, some banks that provide these loans often are not knowledgeable enough about this program.
Your story can be equal or better than Robert’s story; Peach Capital is always ready to help walk you through the procedures and provide the consultative advice that is necessary for you to become comfortable with the many nuances of the small business loan. We are committed to making the small business loan process as comfortable and seamless as possible.
How do SBA loan programs work?
Government Guaranteed business loans (SBA loans) are typically offered through banks and lenders that partner with the Small Business Administration (SBA). The SBA (Small Business Administration) is a U.S. government body, with the motive of providing support for small businesses and entrepreneurs. For each loan authorized, a government-backed guarantee offers serious credibility, since the lender knows that even if you default, the government will pay off the balance. These loans can be applied to a number of uses, such as purchasing new equipment, financing leasehold improvements, and commercial mortgage on buildings, refinance existing debt and establishing a line of credit.
The most used SBA loan programs
The SBA extends financial help through various lending programs it has to offer. Some of the more popular loans are:
- 7(a) Loan Guarantee Program: aimed primarily at helping a small business start or expand its services. The maximum size of such a loan is $5 million.
- Microloan Program: mostly used for short-term purposes, such as the purchase of goods, office furniture, transportation, computers, etc. The maximum amount is fixed at $50,000.
- 504 Fixed Asset Program: featuring fixed-rate and long-term financing, these loans are aimed at applicants whose business model will benefit their community directly, either by providing jobs or bringing needed services to an underserved area. Again, the maximum amount is $5 million.
- Disaster Assistance: under this program, loans are sanctioned to renters or homeowners with a low-interest, long-term plan for the restoration of property to its pre-disaster condition.
For more information, please read about How does SBA 7(a) work into SBA’s Financial Management Systems and Strategy?
Traditional business loans
A traditional business loan is a bank loan, pure and simple. But often there’s nothing simple about acquiring one of these loans, even if you go through the Small Business Administration.
Many traditional lenders will consider your business credit report when making decisions about whether or not to approve your loan request or what your terms might be.
Building a relationship with a lender can be the key to getting a loan, and the earlier you start (i.e. BEFORE you really need the money), the more your lender can help you along the way. By the time you are actually in need of the funding, hopefully, your lender will feel confident in giving you a loan.
There’s only one type of traditional lending and it comes from a bank; however, there are different types of bank loans; working with Peach Capital as your financial advisor, we can help you determine which one may be the best for your business. You’ll want to consider two major things when deciding between Bank business loan options:
- The terms of the loan
- The collateral required to obtain the loan
You’ll need to think long-term with a bank small business loan since they usually only give business loans for more than $250,000, you’ll likely be paying back what you borrow for a lengthy time period. Find below are some Small Business Loans provided by Banks:
- Working capital _ is the cash a company has to fund its short-term operational needs like payroll, rent, and monthly utility bills. Working capital loans are a business funding option that can enable the business to continue functioning in a challenging time. This is typically due to being short on cash and not being able to liquefy assets to cover its operational overhead.
- Lines of credit _ a small business line of credit is subject to credit review and annual renewal, and is revolving, like a credit card: Interest begins to accumulate once you draw funds, and the amount you pay (except for interest) is again available to be borrowed as you pay down your balance. As with a credit card, the lender will set a limit on the amount you may borrow.
- Business credit cards _ help you manage your finances by making a distinction between your personal and professional purchases. In addition, allows you to receive a certain percentage of your expenses as rewards on the credit card, depending on the card chosen. Whether you are starting a small business or running a well-established business, it is essential to find the right credit card to manage your expenses and make your business thrive.
- Short-term commercial loans _ is a type of business capital loan that provides your company with quick working capital. Like most other bank loans, you’ll receive a lump sum of cash upfront which is repaid to your short-term lender over a set period of time.
- Longer-term commercial loans _ is a bank term loans which usually carry fixed maturities and interest rates as well as a monthly or quarterly repayment schedule. The long-term bank loans are always supported by a company’s collateral, usually in the form of the company’s assets.
- Equipment leasing _ is an equipment finance agreement which is viewed as a bridge between a lease and a loan. From the perspective of an end user’s obligations contained in a lease or finance agreement, they are the same. An EFA is similar to a loan and EFA’s use terms like “lender” and “borrower” instead of “lessor” and “lessee”
- Letters of credit _ is a written commitment to pay, by a buyer’s or importer’s bank (called the issuing bank) to the seller’s or exporter’s bank (called the accepting bank, negotiating bank, or paying bank).
A letter of credit guarantees payment of a specified sum in a specified currency, provided the seller meets precisely-defined conditions and submits the prescribed documents within a fixed timeframe. These documents almost always include a clean bill of lading or air waybill, commercial invoice, and certificate of origin. To establish a letter of credit in favor of the seller or exporter (called the beneficiary) the buyer (called the applicant or account party) either pays the specified sum (plus service charges) up front to the issuing bank or negotiates credit.
How to get a traditional business loan?
As a small business owner, knowing how loans work and getting them is absolutely crucial. Many entrepreneurs, however, wait until the last minute to think about loans, they prefer to do well on great business plans, but they never care that they will often need business loans to fund those plans.
“Asking for loans is unpleasant; it’s like asking your dad for the car keys”
Small businesses owner should start this “unpleasant” process early, however, partly because it could prove to be long and difficult. Normally, small business owners often need to try at more than one bank to get a traditional small business loan.
During the process of dealing with a bank, moreover, they may be asked to provide additional documents they previously did not anticipate needing, small business owners need to be patient in this entire process.
How to Prepare for Your Appointment?
Shopping for any traditional small business loans, the goal of the bank is to get its money back. Even if the loan is made through the Small Business Administration (SBA), it is still a bank that ultimately risks its capital. Banks usually get their money back from the borrower’s revenues. If that is not possible, banks can also get their money back from selling assets pledged as collateral or from the small business owners personally.
Therefore, besides documents relating to the business projections, banks may often request documents relating to the personal finances of the small business owner and whatever assets that can be pledged as collateral.
Ideally, you’re starting to work early with a lender on in your loan process, but even though it’s early, there are still things you need to know and be prepared with when you meet your lender. Below are the few things you may need to have/know for your appointment:
- Your business credit file
- Personal information
- Business License
- Personal and Business Tax Returns
- Balance Sheet
- Business Plan
- Legal Documents Pertaining to Ownership
- Bank Statements
- Profit and Loss Statement
- Information on Existing Debt
Lenders/Banks examine five traditional core attributes of borrowers when making financing decisions. These are referred to as the 5 “C’s”
- Cash Flow (capacity to repay)
- Credit Analysis
Regarding business projection numbers – that is, assessing the probability of repayment from borrower revenues – it is all about justifying those numbers, preferably with facts. For existing businesses, that may mean financial statements.
Some of the hard questions a lender may ask to include:
- How many customers do you need?
- How do you find them?
- Who are satisfying these customers already?
- hy would they feel compelled to buy from you?
- What is your capacity to deliver those products?
- What is the cost to deliver those products?
Many small businesses are denied bank loans simply because they aren’t prepared, or because their business credits aren’t strong enough. Banks have actually increased their small business lending since 2012, especially community banks, which upped lending across the country to $3.5 billion after the 2010 Small Business Jobs Act went into effect.
Traditional lenders may not approve many small business loans, but when they do, the terms and conditions are good. That is why most of the small business owners consider as a priority the possibility of building their commercial and personal credit report while they think of alternative loans so that in the future they may be able to apply and qualify for a loan from the bank or even the SBA.
Learning from Mistakes
Sometimes, the best efforts of the small business owner are not good enough to secure a loan. When rejections happen, it is recommended turning them into learning lessons. Often times, if the small business owner manages to remain calm and polite, he can get candid responses as to why he was rejected. These explanations often turn into keys to successfully securing a loan from another bank in the future.
In most cases, maintaining a good business credit report is enough to qualify. In addition, it instills confidence not only in the lender but also in you. There is at least one SBA office in every state in America. If you contact them regarding the startup status of your business model and plan, you can get started on a government small business loan that will give you the financing to make your dreams a reality.
Calculate your monthly payment before you apply for a business any kind of business loan, to help you determine how much to request. Getting into a loan that you can’t afford to pay off can cause a lot of damage to your business. The saying, “the bigger the risk, the bigger the reward” doesn’t necessarily apply here.
Make sure you aim for a payment that you can realistically afford. Having an exact number will give you stronger leverage and allow you a better chance of negotiating with a lending company or funding partner.
P.S. As always, please take a minute to leave a comment on my blog. I want it to be a conversation rather than a rant from my soapbox.
P.P.S. And don’t forget my constant reminder: we’re still lending!
Call 800-722-5956/email: email@example.com/fax 877-624-4455/live chat with us on the next wealth-creating commercial property ownership loan you know about.