(a) Relenders or reinvestors. You are not permitted to finance any business that is a relender or reinvestor.
(1) Definition. Relenders or reinvestors are businesses whose primary business activity involves, directly or indirectly, providing funds to others, purchasing debt obligations, factoring, or long-term leasing of equipment with no provision for maintenance or repair.
(2) Exception. You may provide Venture Capital Financing to Disadvantaged Businesses that are relenders or reinvestors (except banks or savings and loans not insured by agencies of the federal government, and agricultural credit companies). Without SBA's prior written approval, total Financings under this paragraph (a)(2) that are outstanding as of the close of your fiscal year must not exceed your Regulatory Capital.
(b) Passive Businesses. You are not permitted to finance a passive business.
(1) Definition. A business is passive if:
(i) It is not engaged in a regular and continuous business operation (for purposes of this paragraph (b), the mere receipt of payments such as dividends, rents, lease payments, or royalties is not considered a regular and continuous business operation); or
(ii) Its employees are not carrying on the majority of day to day operations, and the company does not provide effective control and supervision, on a day to day basis, over persons employed under contract; or
(iii) It passes through substantially all of the proceeds of the Financing to another entity.
(2) Exception for pass-through of proceeds to subsidiary. You may provide Financing directly to a passive business, including a passive business that you have formed, if it is a Small Business and it passes substantially all the proceeds through to (or uses substantially all the proceeds to acquire) one or more subsidiary companies, each of which is an eligible Small Business that is not passive. For the purpose of this paragraph (b)(2), “subsidiary company” means a company in which the financed passive business either:
(i) Directly owns, or will own as a result of the Financing, at least 50 percent of the outstanding voting securities; or
(ii) Indirectly owns, or will own as a result of the Financing, at least 50 percent of the outstanding voting securities (by directly owning the outstanding voting securities of another passive Small Business that is the direct owner of the outstanding voting securities of the subsidiary company).
(3) Exception for certain Partnership Licensees. If you are a Partnership Licensee, you may form one or more blocker entities in accordance with this paragraph (b)(3). For the purposes of this paragraph, a “blocker entity” means a corporation or a limited liability company that elects to be taxed as a corporation for Federal income tax purposes. The sole purpose of a blocker entity must be to provide Financing to one or more eligible, unincorporated Small Businesses. You may form such blocker entities only if a direct Financing to such Small Businesses would cause any of your investors to incur “unrelated business taxable income” under section 511 of the Internal Revenue Code (26 U.S.C. 511) or to incur “effectively connected income” to foreign investors under sections 871 and 882 of the Internal Revenue Code (26 U.S.C. 871 and 882). Your ownership and investment of funds in such blocker entities will not constitute a violation of § 107.730(a). For each passive business financed under this section 107.720(b)(3), you must provide a certification to SBA as required under § 107.610(g). A blocker entity formed under this paragraph may provide Financing:
(i) Directly to one or more eligible non-passive Small Businesses; or
(ii) Directly to a passive Small Business that passes substantially all the proceeds directly to (or uses substantially all the proceeds to acquire) one or more eligible non-passive Small Businesses in which the passive Small Business directly owns, or will own as a result of the Financing, at least 50% of the outstanding voting securities.
(4) Additional conditions for permitted passive business financings. Financings permitted under paragraphs (b)(2) or (3) of this section must meet all of the following conditions:
(i) For the purposes of this paragraph (b), “substantially all” means at least 99 percent of the Financing proceeds after deduction of actual application fees, closing fees, and expense reimbursements, which may not exceed those permitted by § 107.860.
(ii) If you and/or your Associate charge fees permitted by § 107.860 and/or § 107.900, the total amount of such fees charged to all passive and non-passive businesses that are part of the same Financing may not exceed the fees that would have been permitted if the Financing had been provided directly to a non-passive Small Business. Any such fees received by your Associate must be paid to you in cash within 30 days of the receipt of such fees.
(iii) For the purposes of this part 107, each passive and non-passive business included in the Financing is a Portfolio Concern. The terms of the financing must provide SBA with access to Portfolio Concern information in compliance with this part 107, including without limitation §§ 107.600 and 107.620.
(c) Real Estate Businesses.
(1) You are not permitted to finance any business classified under North American Industry Classification System (NAICS) codes 531110 (lessors of residential buildings and dwellings), 531120 (lessors of nonresidential buildings except miniwarehouses), 531190 (lessors of other real estate property), 237210 (land subdivision), or 236117 (new housing for-sale builders). You are not permitted to finance any business classified under NAICS codes 236118 (residential remodelers), 236210 (industrial building construction), or 236220 (commercial and institutional building construction), if such business is primarily engaged in construction or renovation of properties on its own account rather than as a hired contractor. You are permitted to finance a business classified under NAICS codes 531210 (offices of real estate agents and brokers), 531311 (residential property managers), 531312 (nonresidential property managers), 531320 (offices of real estate appraisers), or 531390 (other activities related to real estate), only if such business derives at least 80 percent of its revenue from non-Affiliate sources.
(2) You are not permitted to finance a Small Business, regardless of NAICS classification, if the Financing is to be used to acquire or refinance real property, unless the Small Business:
(i) Is acquiring an existing property and will use at least 51 percent of the usable square footage for an eligible business purpose; or
(ii) Is building or renovating a building and will use at least 67 percent of the usable square footage for an eligible business purpose; or
(iii) Occupies the subject property and uses at least 67 percent of the usable square footage for an eligible business purpose.
(d) Project Financing. You are not permitted to finance a business if:
(1) The assets of the business are to be reduced or consumed, generally without replacement, as the life of the business progresses, and the nature of the business requires that a stream of cash payments be made to the business's financing sources, on a basis associated with the continuing sale of assets. Examples include real estate development projects and oil and gas wells; or
(2) The primary purpose of the Financing is to fund production of a single item or defined limited number of items, generally over a defined production period, and such production will constitute the majority of the activities of the Small Business. Examples include motion pictures and electric generating plants.
(e) Farm land purchases. You are not permitted to finance the acquisition of farm land. Farm land means land which is or is intended to be used for agricultural or forestry purposes, such as the production of food, fiber, or wood, or is so taxed or zoned.
(f) Public interest. You are not permitted to finance any business if the proceeds are to be used for purposes contrary to the public interest, including but not limited to activities which are in violation of law, or inconsistent with free competitive enterprise.
(g) Foreign investment -
(1) General rule. You are not permitted to finance a business if:
(i) The funds will be used substantially for a foreign operation; or
(ii) At the time of the Financing or within one year thereafter, more than 49 percent of the employees or tangible assets of the Small Business are located outside the United States (unless you can show, to SBA's satisfaction, that the Financing was used for a specific domestic purpose).
(2) Exception. This paragraph (g) does not prohibit a Financing used to acquire foreign materials and equipment or foreign property rights for use or sale in the United States.
(h) Associated supplier. You are not permitted to finance a business that purchases, or will purchase, goods or services from a supplier who is your Associate, except under the following conditions:
(1) The amount of goods and services purchased (or to be purchased) from your Associate with the proceeds of the Financing, or with funds released as a result of the Financing, is less than 50 percent of the total amount of the Financing (75 percent for a Section 301(d) Licensee);
(2) The price of such goods and services is no higher than that charged other customers of your Associate; and
(3) The Small Business purchases no capital goods from your Associate.
(i) Financing Licensees. You are not permitted to provide funds, directly or indirectly, that the Small Business will use:
(1) To purchase stock in or provide capital to a Licensee; or
(2) To repay an indebtedness incurred for the purpose of investing in a Licensee.
The California Financing Law (Fin. Code, § 22000 et seq.) requires the licensing and regulation of finance lenders and brokers making and brokering consumer and commercial loans, except as specified; prohibits misrepresentations, fraudulent and deceptive acts in connection with making and brokering of loans; and provides administrative, civil (injunction and ancillary relief) and criminal remedies for violations of the law. The regulations under the California Financing Law begin with section 1404 of title 10 of the California Code of Regulations (Cal. Code Regs., tit. 10, § 1404 et seq.). A finance lender is defined in the law as “any person who is engaged in the business of making consumer loans or making commercial loans.”
A finance lenders license provides the licensee with an exemption from the usury provision of the California Constitution. There are a number of “non-loan” transactions, such as bona fide leases, automobile sales finance contracts (Rees-Levering Motor Vehicle Sales and Finance Act) and retail installment sales (Unruh Act), that are not subject to the provisions of the California Financing Law. In addition to requiring a license for certain lending activity, the California Financing Law requires a license for certain brokering activity.
A “broker” is defined in the law as “any person engaged in the business of negotiating or performing any act as broker in connection with loans made by a finance lender.” A broker license authorizes brokering of loans to licensed finance lenders; it does not authorize brokering of loans to those who are not licensed finance lenders. The requirements for a license are set forth in Financial Code section 22100 et seq. The law requires applicants to have and maintain a minimum net worth of at least $25,000 and to obtain and maintain a $25,000 surety bond. In general, principals of the company may not have a criminal history or a history of non-compliance with regulatory requirements.
Who is Required to Obtain a Finance Lenders License?
In general, any person engaging in the business of a finance lender or finance broker in California is required to obtain a license under the California Financing Law. The California Financing Law contains a number of exemptions for persons licensed by other regulatory agencies.
Definitions
“Finance lender” includes any person engaged in the business of making consumer loans or making commercial loans.
“Finance broker” includes any person engaged in the business of negotiating or performing any act as broker in connection with loans made by a finance lender. A broker license authorizes brokering of loans to licensed finance lenders; it does not authorize brokering of loans to those who are not licensed finance lenders.
If you are applying for a new license under the California Financing Law, apply through NMLS by selecting “Getting Started” on the NMLS Resource Center page. Follow the California Financing Law Checklist for the requirements specific to new applicants under the California Financing Law.
Do I need to authorize my branch office(s) through NMLS?
In addition to the main office identified on the California Financing Law license, a license is required for each branch location that conducts business with California consumers.
All branches of companies must obtain a license through NMLS. Instructions for a branch license through NMLS
Who does not need a branch license?
Any physical location of a licensee not engaged in lending or brokering activities for California residents does not require a branch license.
Small business owners use business loans to shore up cash flow, purchase expensive equipment and pursue growth.
Business loans tend to be cheaper to get than credit cards and don’t require you to give up a piece of your business to an investor. Alternative business loans are easy to obtain, even if your credit score is less than stellar.
Before shopping for a business loan, you have to ask yourself how much money you need, what you are using it for, and how long it will take to pay it back.
This article is for business owners who are considering applying for a small business loan.
Alternative lenders are important for small businesses looking for loans that may not have the option of being financed through a traditional bank. These lenders provide several different types of loans, ranging from merchant cash advances to equipment financing.
We scrutinized numerous providers to find the best lenders. Below is a guide to help you understand the overall loan market and choose an alternative lender and loan option for your small business. If you have a good idea of what you’re looking for and are familiar with basic loan concepts, check out our best picks for small business loans.
Importance of a business loan
Business loans have long been a viable way to keep operations going. They are used by business owners for many reasons, such as a short-term boost to cash flow or to cover the cost of pricey equipment. Business loans can also be used to pursue growth and to consolidate high interest debt. There are a lot of benefits of going taking funding route, including the following:
You keep full control of your business. When you take out a business loan your bank or alternative lender isn’t going to tell you had to use the funds. That’s not true when you have investors providing capital. They usually want a say in how the business is run. Bank loans do come with interest and fees, but you aren’t giving up a stake in your business, a piece of the profits, and control in operations.
When you take out a business loan your bank or alternative lender isn’t going to tell you had to use the funds. That’s not true when you have investors providing capital. They usually want a say in how the business is run. Bank loans do come with interest and fees, but you aren’t giving up a stake in your business, a piece of the profits, and control in operations. Funding is fast. Raising capital via venture capitalists or other investors can take as long as 12 months. Borrowing money from a bank, credit union or online lender is much faster and when you apply online, some lenders can approve your application in minutes.
Raising capital via venture capitalists or other investors can take as long as 12 months. Borrowing money from a bank, credit union or online lender is much faster and when you apply online, some lenders can approve your application in minutes. Interest rates are lower for loans than credit cards. When it comes to credit cards and business loans, the latter tends to win out in terms of the cost to borrow. For business owners with the best credit scores, business loan interest rates range from 2% to 13% according to Experian. For business credit cards that rate range is 13.9% and up. Keep in mind your credit score plays a big role in the cost to borrow and if you’ll get approved for a loan.
Key takeaway: Business loans provide business owners with fast access to funding that is cheaper than credit cards and doesn’t require them to share control of their businesses.
Questions to consider before choosing a business loan
Before jumping into the details on the types of loans offered and what loan makes the most sense for your business, take time to assess your current needs. Here are some good initial questions to answer so you have clear goals set before you start your research.
How much money do you need?
What do you need the money for?
How long will it take you to pay it back?
How long have you been in business?
What is the current financial shape of your business?
How much collateral, if any, do you have to put up for the loan?
What’s your credit score?
Do you have any other outstanding loans?
Are you looking for a short or long-term loan?
Key takeaway: Before you begin shopping for a business loan, you need to know how much money you need, how you will use it and how long it will take to repay. You also need to know your credit score and how it will affect your interest rates and decide if you have any collateral that you are willing to pledge.
Types of lenders
Small Business Administration loans
The Small Business Administration offers several loan programs designed to meet the financing needs of a range of business types.
With these loans, the government isn’t directly lending small businesses money. Instead, the SBA sets guidelines for loans made by its partners, which include banks, community development organizations and microlending institutions.
The SBA reduces the risk to lenders by guaranteeing the loans will be repaid.
Businesses have a variety of SBA loan types to choose from, each of which comes with its own parameters and stipulations on how the money can be used and when it must be repaid.
Pros and cons:
The government guarantee, which typically covers 75% to 90% of the loan, eliminates much of the risk for the lender. SBA loan terms also tend to be more favorable to borrowers. The downsides are that additional paperwork needs to be filed, extra fees need to be paid, and it takes longer to get approved. You may also have to meet stricter requirements to qualify for a loan from a traditional SBA lender.
To learn more about specific SBA loans, review the SBA loans portion of the Types of Loans section below.
Conventional bank loans
Pros and Cons: The biggest pluses of conventional bank loans are that they carry low interest rates and, because a federal agency is not involved, the approval process can be faster. However, these types of loans typically include shorter repayment times than SBA loans and often include balloon payments.
Additionally, it’s often difficult to get approved for a conventional bank loan. Traditional banks approved only 23% of funding requests in March of 2016, which was considered a new high. Compared to the near 61% approval rating of alternative lenders in the same timeframe, it still seems low.
Alternative lenders
Alternative lenders are particularly attractive to small businesses that don’t have a stellar financial history, because approval requirements aren’t as stringent.
Alternative lenders typically offer online applications, make approval decisions in a matter of hours and provide funding in less than five days.
There are direct alternative lenders that lend money directly to small businesses and lending marketplaces, which provide small businesses with multiple loan options from different direct lenders.
Examples of direct alternative lenders are Kabbage, OnDeck, and SBG Funding. Lending marketplaces include Bizfi and Biz2Credit.
Pros and cons: The positives of working with an alternative lender are that your business doesn’t need to have a stellar financial history; there are few restrictions on what you can use the money for, and the loans can be approved almost instantly. The downside is that interest rates can be significantly higher than those charged by a bank. Because of the nature of the loan, it’s important to pore over the fine print and ensure you’re entering into an agreement that makes sense financially for your business.
Editor’s Note: Looking for information on business loans? Fill in the questionnaire below, and you will be contacted by alternative lenders ready to discuss your loan needs.
Types of loans
SBA loans
Currently, the SBA offers four types of small business loans:
7(a) Loan Program: 7(a) loans, the SBA’s primary lending program, are the most basic, common and flexible type of loan. They can be used for a variety of purposes, including working capital; the purchase of machinery, equipment, furniture, and fixtures; the purchase of land and buildings; construction of new buildings; renovation of an existing building; the establishment of a new business or assistance in the acquisition, operation or expansion of an existing business; and debt refinancing. These loans have a maximum amount of $5 million, and borrowers can apply through a participating lender. Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed assets. [ Related Content: How to Secure a Business Grant]
7(a) loans, the SBA’s primary lending program, are the most basic, common and flexible type of loan. They can be used for a variety of purposes, including working capital; the purchase of machinery, equipment, furniture, and fixtures; the purchase of land and buildings; construction of new buildings; renovation of an existing building; the establishment of a new business or assistance in the acquisition, operation or expansion of an existing business; and debt refinancing. These loans have a maximum amount of $5 million, and borrowers can apply through a participating lender. Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed assets. [ How to Secure a Business Grant] Microloan program: The SBA offers very small loans to new or growing small businesses. The loans can be used for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery, or equipment, but they can’t be used to pay existing debts or purchase real estate. The SBA makes funds available to intermediary lenders, which are nonprofits with experience in lending and technical assistance. Those intermediaries then make loans up to $50,000, with the average loan being about $13,000. The loan repayment terms vary based on several factors, including the loan amount, planned use of funds, requirements determined by the intermediary lender and the needs of the small business borrower. The maximum repayment term allowed for an SBA microloan is six years. [ Related Content: Microfinance: What Is It, and Why Does It Matter?]
The SBA offers very small loans to new or growing small businesses. The loans can be used for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery, or equipment, but they can’t be used to pay existing debts or purchase real estate. The SBA makes funds available to intermediary lenders, which are nonprofits with experience in lending and technical assistance. Those intermediaries then make loans up to $50,000, with the average loan being about $13,000. The loan repayment terms vary based on several factors, including the loan amount, planned use of funds, requirements determined by the intermediary lender and the needs of the small business borrower. The maximum repayment term allowed for an SBA microloan is six years. [ Microfinance: What Is It, and Why Does It Matter?] Real estate and equipment loans: The CDC/504 Loan Program provides businesses with long-term, fixed-rate financing for major assets, such as equipment and real estate. The loans are typically structured with the SBA providing 40% of the total project costs, a participating lender covering up to 50% and the borrower putting up the remaining 10%. Funds from a 504 loan can be used to purchase existing buildings, land, or long-term machinery; to construct or renovate facilities; or to refinance debt regarding an expansion of the business. These loans cannot be used for working capital or inventory. The maximum amount of a 504 loan is $5.5 million, and these loans are available with 10- or 20-year maturity terms.
The CDC/504 Loan Program provides businesses with long-term, fixed-rate financing for major assets, such as equipment and real estate. The loans are typically structured with the SBA providing 40% of the total project costs, a participating lender covering up to 50% and the borrower putting up the remaining 10%. Funds from a 504 loan can be used to purchase existing buildings, land, or long-term machinery; to construct or renovate facilities; or to refinance debt regarding an expansion of the business. These loans cannot be used for working capital or inventory. The maximum amount of a 504 loan is $5.5 million, and these loans are available with 10- or 20-year maturity terms. Disaster loans: The SBA provides low-interest disaster loans to businesses of all sizes. SBA disaster loans can be used to repair or replace real estate, machinery, and equipment as well as inventory and business assets that were damaged or destroyed in a declared disaster. The SBA makes disaster loans of up to $2 million to qualified businesses.
Loans from conventional banks and alternative lenders
Banks and alternative lenders offer some similar loans to those offered by the SBA, as well as funding options that the SBA doesn’t offer, including the following:
Working capital loans: Working capital loans are short-term solutions for businesses in need of money to fund operations. Working capital loans are available from both banks and alternative lenders. The advantage of a working capital loan is that small businesses can keep their operations running while they search for other ways to increase revenue. Some downsides of working capital loans are that they often come with higher interest rates and have short repayment terms.
Working capital loans are short-term solutions for businesses in need of money to fund operations. Working capital loans are available from both banks and alternative lenders. The advantage of a working capital loan is that small businesses can keep their operations running while they search for other ways to increase revenue. Some downsides of working capital loans are that they often come with higher interest rates and have short repayment terms. Equipment loans: In addition to the SBA, both banks and alternative lenders offer their own types of equipment loans. Equipment loans and leases provide money to small businesses for office equipment, like copy machines and computers, or things such as machinery, tools, and vehicles. Instead of paying for the large purchases all at once upfront, business owners make monthly payments on the items. One benefit of equipment loans is that they are often easier to obtain than other types of loans, because the equipment being purchased or leased serves as collateral. Equipment loans preserve cash flow since they don’t require a large down payment and may offer some tax write-off benefits.
In addition to the SBA, both banks and alternative lenders offer their own types of equipment loans. Equipment loans and leases provide money to small businesses for office equipment, like copy machines and computers, or things such as machinery, tools, and vehicles. Instead of paying for the large purchases all at once upfront, business owners make monthly payments on the items. One benefit of equipment loans is that they are often easier to obtain than other types of loans, because the equipment being purchased or leased serves as collateral. Equipment loans preserve cash flow since they don’t require a large down payment and may offer some tax write-off benefits. Merchant cash advance: This type of loan is made to a business based on the volume of its monthly credit card transactions. Businesses can typically receive an advance of up to 125% of their monthly transaction volume. Repayment terms vary by lender. Some take a fixed amount of money out of a business’s merchant account daily, while others take a percentage of daily credit card sales. The advantages of merchant cash advances are that they are relatively easy to obtain, funding can take just a few days and the loan is repaid from credit card sales. The biggest downside is the expense: Interest runs as high as 30% a month, depending on the lender and amount borrowed.
This type of loan is made to a business based on the volume of its monthly credit card transactions. Businesses can typically receive an advance of up to 125% of their monthly transaction volume. Repayment terms vary by lender. Some take a fixed amount of money out of a business’s merchant account daily, while others take a percentage of daily credit card sales. The advantages of merchant cash advances are that they are relatively easy to obtain, funding can take just a few days and the loan is repaid from credit card sales. The biggest downside is the expense: Interest runs as high as 30% a month, depending on the lender and amount borrowed. Lines of credit: Like working capital loans, lines of credit provide small businesses money for day-to-day cash-flow needs. They are not recommended for larger purchases and are available for as short as 90 days to as long as several years. With a line of credit, you take only what you need and pay interest only on what you use, rather than the entire amount. These loans are usually unsecured and don’t require collateral. They have longer repayment terms and give you the ability to build up your credit rating if you make the interest payments on time. The downsides are the additional fees and these loans can put small businesses in jeopardy of building up a large amount of debt. [ Related Content: What Is a Revolving Line of Credit?]
Like working capital loans, lines of credit provide small businesses money for day-to-day cash-flow needs. They are not recommended for larger purchases and are available for as short as 90 days to as long as several years. With a line of credit, you take only what you need and pay interest only on what you use, rather than the entire amount. These loans are usually unsecured and don’t require collateral. They have longer repayment terms and give you the ability to build up your credit rating if you make the interest payments on time. The downsides are the additional fees and these loans can put small businesses in jeopardy of building up a large amount of debt. [ What Is a Revolving Line of Credit?] Professional practice loans: Professional practice loans are designed specifically for providers of professional services, such as businesses in the healthcare, accounting, legal, insurance, engineering, architecture and veterinary fields. These types of loans are typically used for purchasing a practice, real estate, or new equipment; renovating office space; or refinancing debt.
Professional practice loans are designed specifically for providers of professional services, such as businesses in the healthcare, accounting, legal, insurance, engineering, architecture and veterinary fields. These types of loans are typically used for purchasing a practice, real estate, or new equipment; renovating office space; or refinancing debt. Franchise startup loans: Franchise startup loans are designed for entrepreneurs needing financing to open their own franchise. These loans, offered by banks and alternative lenders, can be used for working capital or to pay franchise fees, buy equipment, and build stores or restaurants.
Franchise startup loans are designed for entrepreneurs needing financing to open their own franchise. These loans, offered by banks and alternative lenders, can be used for working capital or to pay franchise fees, buy equipment, and build stores or restaurants. Invoice factoring: Invoice factoring loans are when an alternative lender advances small businesses money for outstanding invoices. As the invoices are collected, the lender receives the money in addition to a fee. This can be a good option for businesses looking to get funding upfront for invoices that have yet to be paid.
Key takeaway: The SBA, banks and alternative lenders offer a variety of business loans that include term loans, working capital loans, lines of credit and invoice factoring.
Small business loan FAQs
Still have more questions about the different loan options? No problem. Here are some questions and answers that may help you come to a decision.
Q. What is the easiest business loan to get?
If speed is of the essence and you have a great credit score, online lenders are going to be the quickest route to funding. You can apply and be approved in minutes and receive your funding in a couple of days. If you have a less-than-stellar credit score, you have a better shot getting approved with an alternative lender than you do a traditional bank. SBA loans are another option, but the application to approval time can take much longer than with an online lender.
Q. What do lenders consider when reviewing a loan application?
A. There are a variety of factors that both banks and alternative lenders consider:
How long you’ve been in business: The longer track record you have, the more comfortable lenders will feel in loaning your business money.
The longer track record you have, the more comfortable lenders will feel in loaning your business money. Credit score: While some lenders place more stock in credit scores than others, nearly all take the scores into consideration. A bad credit score won’t necessarily rule you out, but it will affect your loan terms. The worse your credit score, the higher your interest rate will be.
While some lenders place more stock in credit scores than others, nearly all take the scores into consideration. A bad credit score won’t necessarily rule you out, but it will affect your loan terms. The worse your credit score, the higher your interest rate will be. Monthly revenue: Lenders want to ensure that you have enough money coming into your business to pay off the loan.
Other factors lenders may consider are previous tax returns, whether you have a history of paying creditors on time, whether you have had any bankruptcies or bounced checks, whether you have sufficient collateral and what you plan to use the money for. [Keep all of your financial records and documents organized with accounting software.]
Q. Does it cost money to apply for a loan?
A. It depends on the lender. It is important to ask what types of fees are associated with the application. Some lenders charge an application fee, while others charge fees for items tied into the application, such as the cost to run your credit report or appraise your collateral.
Q. Where can I find an SBA loan application?
A. Loan applications are available on the SBA website.
Q. If I am applying for an SBA loan, what type of information will the bank ask for?
A. When applying for an SBA loan, small business owners are required to fill out forms and documents for the specific loan they are trying to get. In addition, the SBA encourages borrowers to gather some basic information that all lenders will ask for, regardless of the loan type. The following items are required:
Personal background and financial statements
Business financial statements
Profit and loss statement
Projected financial statements
Ownership and affiliations
Business certificate or license
Loan application history
Income tax returns
Resumes
Business overview and history
Business lease
Q. What questions will I have to answer when applying for an SBA loan?
A. The SBA recommends being prepared to answer several questions, including the following:
Why are you applying for this loan?
How will the loan proceeds be used?
What assets need to be purchased, and who are your suppliers?
What other business debt do you have, and who are your creditors?
Who are the members of your management team?
Q. What will I need if I’m applying for a conventional loan from a bank?
A. When applying for a bank loan, you’re required to share all of your financial details. You’ll need to provide your lender with the complete financial background of your company, your future growth plans and often your personal financial information. The more information you have to illustrate that you’ve run your business well, the more confidence banks will have in investing in you.
You also need to show exactly how you will use the requested money. For example, if you want to purchase new equipment, provide quotes on the exact costs, how much capital you need to facilitate this purchase, and specifically how the new equipment will grow your business.
Q. What type of information do I need to provide to alternative lenders when applying for a loan?
A. Even though it can be easier to obtain a loan from alternative lenders, you still need to provide them with an array of personal, business and financial information. Not all lenders ask for the same information. Some pieces of information they could request include a plan for how the money will be used, your credit history and a verification of your income and assets.
Q. What do I need to consider when applying for a loan through an alternative lender?
A. When considering an alternative lender, consider the following:
Interest rates: Small business owners should know that they can pay off the loan relatively quickly to avoid hefty interest charges.
Small business owners should know that they can pay off the loan relatively quickly to avoid hefty interest charges. Fees and policies: Speak with each lender about fees that may apply when the loan is funded and how the repayment will affect your cash flow.
Speak with each lender about fees that may apply when the loan is funded and how the repayment will affect your cash flow. The lender’s ratings and review: There are many companies today that say they are alternative lenders, but look for lenders that have an A+ rating with the Better Business Bureau.
Additional reporting by Donna Fuscaldo.
Editor’s Note: Looking for information on business loans? Fill in the questionnaire below, and you will be contacted by alternative lenders ready to discuss your loan needs.