Business Loans for People With Bad Credit
When you’re planning to start or expand a business, one of the important requisites for it to happen is to have enough funding to finance the needs of your business. This will include financing materials and equipments, salary for your employees and even advertising purposes.
To be able to get the need amount of cash to fuel their business plans, businessmen often get a business loan. This can help jump-start their business from the drawing board to the real thing. A loan can provide you with your needed cash for you to start and operate your business. However, taking a loan from the bank and other lending firms will often require you to present your credit ratings. When this happens, people having bad credit history often find it hard, if not impossible to get an approval.
Although you may not have a great credit rating, you still have a chance of getting a business loan to get the cash that you need. This is by getting a bad credit business loan. This loan can allow you to have the money you need for your business without your credit rating being scrutinized. This is mostly offered by lending companies that you can find online. Through it, you can transform your dreams into a reality.
What are the types of loans that you can get with a bad credit loan?
There are two choices that you can have when trying to choose a loan type that is most suited for you. You can either get an unsecured loan or a secured one. Each can present different advantages and disadvantages.
Unsecured business loans are ones that does not require you to have collateral. This type of loan is more risky in the part of the lender. That is why it may not be easy to get an approval for this kind of loan. For lenders that offers unsecured bad credit business loans, being employed can be a big plus when trying to apply for one.
However, even if collateral is not needed and you don’t face the risk of losing anything, there are still a few setbacks when applying for this loan. If you do get an approval, you will often need to face higher interest rates, because of the nature of the loan. Aside from that, the amount of money you can have with this kind of loan is lesser than what you can get with a secured business loan.
If you opt to get a secured business loan, you may easily get an approval even with bad credit. There are several lenders that offers bad credit secured business loans online. A secured loan requires that you put up your property as collateral. This allows the lender to have a fall back, in case you fail to make the necessary payments for your debt.
Although you are the one taking the risks with this kind of loan, it allows you to enjoy many benefits which can be beneficial for your business. Since lenders are secured that they can recover their losses even if you default your payment, you are able to enjoy much lower interest rates and is able to get a larger amount. You will also be given a better loan deal with a secured business loan.
Other than that, if you’re confident that you can make payments on time, then the risks that you are facing with a secured business loan is quite small.
Small Business Loans For Bad Credit – Know This Before You Get A Small Business Loan
There was a time when business owners could simply walk into a bank and get a loan for the business based on their working relationship with the bank and loan officer. With today’s turbulent economy, those times are over, and banks are not willing to expend poor credit business loans. Today’s loans are issued primarily based on the credit score of the business owner, which can make it frustrating to search for a loan to expand or improve your business. Rather than turning to your local bank to find small business loans for bad credit, there are some other alternatives to help you to understand how to get a small business loan with bad credit.
In some cases, local business owners can find small business loans for bad credit by speaking to a smaller, local bank and asking them to consider factors other than the owner’s credit score. Many people don’t realize that their business also has a credit score, which is based on the same factors as a personal credit score- your business credit cards and other unsecured debts, payment history for bills, and the outstanding balance on any loans your company has. If your business has a good credit rating, you may be able to obtain a loan even if your own credit rating is lower.
Online specialty lenders sometimes offer small business loans for bad credit. Some of these lenders actually search for businesses that need money. Many of these lenders offer loans that have high initial interest rates, with the provision that the interest rate will be lowered as the business owner demonstrates the ability to make on-time payments. If you are confident in your business’ ability to pay back the loan, this type of loan can be ideal for your business.
An alternative to poor credit business loans is available to business owners who own their own home. In many cases, you can take out either a home equity loan or offer your home as collateral for a secured loan. For those business owners who are confident in their ability to pay back the amount borrowed, using a home as collateral toward bad credit business loans can be a way to get a lower rate and better loan terms.
When you are looking for a more flexible way to get money for your business to make purchases and pay small bills, you may want to consider looking for poor credit business credit cards. There are lenders who are willing to offer credit cards to businesses in lieu of small credit business loans, and by using small business credit cards for bad credit, you can help to build up the credit score of your company. If you need money to make small purchases, such as office equipment, fuel, or supplies, applying for poor credit business credit cards can offer you far more flexibility than poor credit business loans.
Finding the money you need to make your business work may not be as intimidating as you think. Using the resources of lenders who are willing to extend small business start up loans for bad credit, can not only help you stay afloat in a difficult economy, they can help your business grow. Don’t let worries about bad credit keep you from applying for commercial loans.
However, do keep in mind that when you are looking for Small Business Loans For Bad Credit, you have to look at all the alternatives and compare the interest rates of different loans to ensure that you are getting the best deal possible. Often times, you will get the best rates for loans that are secured by some form of collateral.
Poor Credit Business Loans – Understanding Poor Credit Start Up Business Loans
In today’s economy, there are still many opportunities for people who are willing to start their own business. For those planning to open a business who have had difficulty with their credit, they may be worried that they will be unable to get a loan to help open or expand a business. However, there are lenders that specialize in poor credit business loans. Choosing the right company to provide poor credit small business loans is the first step in helping your business grow into the successful venture that you want it to become.
As with any loan, poor credit business loan rates are usually slightly higher than those offered to people with good credit. Don’t let this stop you though, because companies who specialize in poor credit business loans are often able to offer competitive terms and rates that still make investing in your business a very smart move.
You will want to begin by comparing what different companies have to offer. Poor credit start up business loans are often aimed at people who want to start a small business but who have had difficulty finding a lender who can help them. Often, your best bet will be to use the internet to compare loans to find one that offers you the best loan repayment period and rates. You will want to begin with a strong business plan by answering these questions- how quickly after getting poor credit business loans will you be able to pay off the loan? Are you looking for a loan to start a company by yourself, with partners, or as part of a larger group? You may be able to have a friend or family member co-sign on poor credit business loans to help you reduce the rate you have to pay. Talk to the other people you plan to open your business with if you will be working with partners, and try to find out if they have collateral or other resources that you can pool in order to find a better rate for the loan.
Once you have determined what type of business you will be opening, you will also need to determine what the money you get from your poor credit business loans will be used for. You will need to consider whether you will be buying or renting a business space, if you will be hiring employees, if you will need furniture or other equipment, and if you need to purchase stock for a store. Poor credit business loans funding is not as hard to find if you are prepared to show your potential lender that you have considered carefully what the money will be used for and how your business will succeed.
When you begin comparing poor credit business loan rates, remember that the rate is not the only thing that will determine whether a loan is right for you. You will need to think about the repayment rate, the cost of the loan, and the size of the payments you can afford to make. It is smart to use your small business loans as carefully as possible so that you will have the maximum amount of money remaining with which to make your payments. Starting a small business is a smart way to secure your future, so don’t let poor credit stop you from finding a lender who can help you get the money you need to succeed.
How to Get a Small Business Loan
Need some funds to expand or start a small business? If yes, then you are at the right place, because in this article we are going to talk about how to get a small business loan. Following are some very useful tips that will be helpful to you in getting a loan.
Choosing the Type of Loan
If you want to get the loan then it is very important to take a close look at the different types of loans available. Today there are many types of small business loans available and you have to choose one that will perfectly meet your personal needs. Nowadays, government loans are the most popular type of loans for small businesses because these kinds of funds are comparatively easy to get. These kinds of loans are especially good for people who have served in the military and other government employees.
Another type of loan is the fast business loan. Usually these kinds of credits or loans are acquired through more expensive means. The fast business loans are suitable for people who want to get a small amount for a short period of time. They are also known as payday loans and most of these fast lenders will not even need any kind of credit check.
Woman small business funds are generally available through various private groups or organizations. In order to find these groups you have to search on the Internet or visit your local public library.
The Documentation of Your Loan
After choosing the right kind of loan, now is the time to prepare documentation. When it comes to documentation, it is essential to know that your personal credit history will be relevant to your small business loans statement, especially if your small business does not have a long operating history. Bring your credit history with you to the bank or group from where you want to get your loan. With the help of this history they will make assumptions about how you operate your business.
You also have to show a financial statement in order to prove the financial health of your business. Specifically, banks want to know how much money you are moving in and out of your business. If want to get the loan without any issues, then you should prepare a detailed and precise statement.
Make sure that you have a functional and updated business plan. By preparing a comprehensive business plan you will already get your performance and financial statements prepared. Another important thing to tell about how to get a small business loan is that you must include your and your partner’s bio, your strategies, and track records in your statement.
Selecting a Bank for Getting a Loan
If your documentation is all set then you are ready to ask for the money. When it comes to getting a loan then a question always arises in our minds: “From where should we get our loan?” Start with the financial institutions with which you have had some business relations in the past. The advantage of these places is that these financial institutions already know your financial behavior and business history.
If you have not had any kind of business relationship with any financial institution in the past, then go to somebody who actually wants to do business. The best way to get information about the different financial institutions in your area is through the business section of the local newspaper. The local banks are actively looking for people who need loans for their small businesses and the process with the local banks is lot easier with multi-national financial groups.
So, these are some tips on how to get a small business loan. It is important to choose a group with a good reputation for your small business loan. Try to do some research through the Internet before making any final decision on getting a loan for your small business.
Low Interest Business Loans
Regardless of the state of the economy, all entrepreneurs, either new at their trade or old hats in business, when seeking financing, tend to get caught up in haggling over the lowest possible interest rate that they can achieve.
Who can blame them? Cost savings – especially while we are still experiencing recession like economic symptoms – may be the key to their business’s survival and their personal financial future.
But, sometimes, merely basing a financing decision on just its cost (its interest rate in this case) alone can be even more detrimental. All business decisions should be taken in the whole – with both benefits and costs consider simultaneously – especially with business loans.
Let me explain: In today’s market, any offer of a business loan – regardless of its costs – should not be taken lightly given the fact that these business transactions are hard to come by. Thinking that this interest rate is too high and that a better one will come along tomorrow may just be destructive thinking as nothing may come along tomorrow – especially in this continued sluggish economy and all lenders being overly cautious.
Further, if the business owner’s decision hinges so much on the rate of the loan, then maybe a business loan is not something the business truly needs at this time or may be a decision that just spirals the business further along an unhealthy path.
Example: Let’s take a simple but common business loan situation. A $100,000 loan for 5 years with monthly payments at 8% interest. This loan would require monthly payments of $2,028 for the next 60 months. Now, let’s say the interest rate was 12% instead of 8%. This would result in a monthly payment of $2,225 – nearly $200 per month higher. A significant increase – nearly 10% higher with the larger interest rate.
This is what most business owners, when seeking outside capital tend to get caught up in – the lower rate means more savings for the business and thus a better decision.
But, what happens if the current lender will not lower the rate from 12% to 8%? Or, if another, lower rate loan / lender does not come along? Is it still a good business decision?
Looking at the cost of the loan or the interest rate is purely one sided and could potential affect the long-term viability of your business – the benefits of the loan also have to be weighed in.
Let’s say that the business can take that $100,000 loan and use it to generate an additional $5,000 in new, monthly business income. Does it really matter the interest rate at this point as the nearly $200 difference in the rate is really trivial (especially over the 60 months period) compared to possibly declining the higher rate loan and getting nothing in return (losing out on the $5,000 in new revenue per month).
Or, what if the business would only be able to generate $1,000 in new, extra income from the $100,000 loans? Then no matter what the interest rate (8%, 12% 50% or higher), the business should not even be considering a loan in this situation.
Why do I bring this up? Simply because I have seen business after business either lose out on their future potential or fatally harm their organization over a mere one or two percent increase in a business loan rate. We are just conditioned to think that if we do not get the rate we feel we deserve – then the deal is bad for us. That can not be further from the truth. Know that these conditioning instincts we tend to have are more from the fact that competitors (those other lenders seeking our business) tell us we can do better or that we deserve better – but in end only finding out that those ploys never really work to our benefit.
The lesson here is that all business decisions are more complex then we may initially think or been lead to believe. We are taught from very early in life to negotiate for the lowest costs – like zero interest car loans or buy now with “the lowest mortgage rates in decades” – either case, one would not buy a car or a house (regardless of the interest rate) if there was not a great need – a need that provides more in benefits then its costs.
The same should be done with business loans. Loans are merely an asset to a business and should be treated as such. Business loan assets should be used to generate more in revenue than they cost – the more the better. If they are not being used (like any other business asset) to generate the greatest benefit that they can generate, then they should be pulled from whatever use they are currently being employed in and put into use that will generate the greater benefit. It is simply a law of business.
Thus, merely focusing on only one side of a business decision – the interest rate for a business loan decision – can have an unforeseen, adverse affect on the business – creating more harm then good. The entire situation should be taken into advice before a decision is made.
In fact, in the case outlined above, the interest rate can increase as high as 56% for the 60 months before the cost would outweigh the benefits – provided there were no additional costs associated with the loan.
In my experience, I have always found it much easier to look at the benefits first (like the increased monthly revenue that can be generated) then search out the lowest costs options to receive those benefits. But, as stated, this is essentially opposite of what we tend to be taught in our society or in our markets (remember the zero percentage auto loans – which have the lost interest revenue built into the price). But, sometimes the best entrepreneurs think outside the box and tend to go against any conventional wisdom we may have been subject to – mostly for the benefit of others and not ourselves.
Therefore, when seeking a business loan and finding yourself fighting hard for a small decrease in your interest rate – be sure to step back for a moment and look at the entire picture – as a low interest business loan may not be in the best interest of the business in all circumstances.
A Step by Step Guide on How to Get a Business Loan
On December 17, 2008, the prime rate in the United States was dropped from 4.00% to 3.25%, the level that it currently stands at right now. The lower interest rate was initiated by the Federal Reserve to stimulate lending to individuals and businesses, the first salvo in the war to combat economic recession. On the surface, it appears to have made very little difference. The economy in the United States still declined and unemployment rose to a record high rate of over 10% in some states. Despite that, there’s no way of knowing how much worse things would be, were it not for the lower prime rate. Today, as the nation crawls out from the hole it’s been in, businesses are beginning to look for funding to expand or in some cases just to stay afloat.
There is a process involved in getting this funding, requiring a step by step approach and some knowledge of exactly how to get a business loan. That process begins with an evaluation of needs, continues with an examination of loans and funding options available, and hopefully culminates in a business loan which will help your company achieve its goals. It’s not as simple as it once was, when all you had to do was show up at your bank and put some collateral up to get a loan. Credit score is now a factor, as is credit and payment history. The nature and success rate of businesses in your industry will also be taken into account. After what was a horrific three year period for banks and lending institutions, you’re not going to be approved for a business loan without some heavy duty footwork on your part.
Evaluating Your Needs for a Business Loan
Just because you can do something doesn’t mean that you should. Before you apply for a business loan, evaluate the reasons why you need one. The economy is improving. Are you running in the red right now or are you managing to pay your bills and make a small profit? Taking out a loan to increase profit margins is one thing, but is the debt you’re taking on worth the return you’ll get back from it? Make sure when you calculate these numbers that you include the interest payments and any fees the bank charges. Add up total cost and then project returns and how exactly those returns are going to be realized. There has to be a plan of some kind and the bank will want to see it before they give you anything.
Where to Go for a Business Loan
A Treasury report released at the end of last year showed that major banks had decreased business loan balances by $1 billion in the last quarter of 2009. These were the same banks that received TARP funds from the federal government’s bank bailout. Justifying the cuts as prudent management, they nonetheless all pledged, after some pressure from the Obama administration, to increase lending in 2010. Some of those pledges of more business lending came from major players in the banking industry. Bank of America (5 billion more), Wells Fargo (25% more), and JP Morgan Chase ($4 billion more) have all increased their lending this year, though much of the JP Morgan Chase lending is in the form of business credit cards.
There are also online resources available, including sites that will shop your loan request around to various banks, financial institutions and private lenders. There are different types of business loans, including working capital loans, merchant account advances, secured and unsecured loans. You can borrow against money that is owed to you and you can use your credit card receipts from recent months as proof of your ability to pay. You can even sell your future credit card sales or accounts receivables, an act that doesn’t technically qualify as a loan, but bears mention here. No matter which way you go you’ll be facing the same questions and need the same set of numbers to back up your request for funding.
What do Lenders look for in Business Loan Applicants?
A simple rule of thumb when doing a self-evaluation of what the bank will look for is to look at the five C’s: Character, Capacity, Collateral, Capital, and Conditions. Character is about you and your credit score and history. Capacity is proving your ability to pay. Collateral and Capital are very similar. They both offer a guarantee to the bank that you’ll pay them back. Conditions refer to your knowledge of your own industry and the plan that you have for use of the money you’re going to borrow. If you did your homework in the earlier step “Evaluating Your Needs for a Business Loan” this should not be a problem. The bank or lending institution will see that you have a definite plan for the improvement of your company and look upon that favorably.
Communicating with the Lender: How to finally get a Business Loan
Once you’ve evaluated your needs for a business loan, asked yourself all the difficult questions about credit-worthiness, and chosen a lender to apply to, it’s time to walk through the door and present your case. Communication is the most important element at this stage of the loan process. You need to have the ability to explain what you want, why you want it, and how you plan to pay it back. Have a solid business plan in hand, with a detailed explanation about how you will use the money from a business loan and what you plan to do about paying it back. The financial information you present about your company should be current and accurate. The bank will turn you away of you try to rely on the successes of yesteryear. You’ll also want to present alternate sources for repayment should the first plan not succeed. Remember the climate you’re running a business in right now and what the banks have been through recently. If you cross all your t’s, dot your I’s, and anticipate any questions you’ll be asked, there’s no reason why you shouldn’t be approved for a business loan.
3 Reason You Should Use A Credit Union For Your Business Loan Needs
Most of the time, when business owners (new entrepreneurs or experienced proprietors) think about financing their businesses, they think about their local banks – which they should. After all, they drive by these organizations everyday and might even have an account or two with them.
But, there are times when these banks might not be the best options for landing a needed business loan – either because the bank does not offer the loan product your company needs or because (like most of us these days) you just do not qualify under their heighten standards.
However, that does not mean that you still cannot get the financing your business wants – from start up funding to growing an established business – from a local financial institution other than your bank.
Did you know that some local credit unions also offer business loans? And, do you know that if they don’t, they do offer other financing products that you can use to start or grow your business?
Credit Unions For Business Financing
If you can get a loan from your bank – great. You should start there. But, if you can’t, simply drive right over to your local credit union and see what loan programs they offer.
Not only do you stand a good chance of getting the capital you need but you might be able to do it cheaper and with a lot less hassle.
Let me explain: First let’s call these CU for simplicity.
CUs, when it comes to business financing, offer the following benefits:
1) Business Loans – Some CUs do provide true business loans – the same products that your local bank offers. And, there are more of them doing this then you think.
Further, in many cases, if the CU does make business loans they usually don’t have such high credit standards that other lenders do. CUs tend to focus more on how your business and their loan impact the community at large – not just their bottom line. Most CUs have lower credit score requirements, better debt ratio limits, lower overall collateral value levels and usually spend less effort on scrutinizing income and tax return information. Simply put, their business loans (the same products that banks and other business lenders offer) are easier to qualify for.
According to State Employees’ CU in Raleigh, NC, when talking about how they underwrite their loan products:
Our focus is not on profits, but on fair, quality service.
So, not only are there underwriting criteria easier to pass, but since they make their loan decisions locally, they tend to take more of your story into account – which only benefits you and your ability to get approved.
2) Personal Loans – while banks also offer personal loans, again, CUs have easier approval standards. And, they are more flexible in the products they offer – making their loans fit you and not the other way around.
Now, you might think that you don’t want a personal loan for your business. But, I am here to tell you that all loans, business, personal or otherwise, from banks, CU, or private lenders, are in fact all personal loans.
Here’s why. You apply for a business loan – the type of lender does not matter – and you jump through all the hoops required to qualify. They look at your revenue or income, they look at your current debt, they look at and valuate your collateral and in the end, they approve your request.
They tell you what your monthly payment will be, they tell you how they are going to attach a claim to your assets and then – here is the kicker – they make you sign a personal guarantee – even on a business loan.
And, it is this personal guarantee that washes away all that other stuff about business credit facilities. Because, if you or your business do not pay as agreed, that personal guarantee allows that lender – bank, CU, private lender – to come after your personal income and assets to make that loan whole – which is the very definition of a personal loan. The one single item that you are looking to avoid by getting a business loan – avoiding personal risk – is also the one single item you cannot avoid, no matter what type of loan you are requesting.
However, there is nothing that states that you cannot use the proceeds from a personal loan in or for your business.
Bottom line here for you is this: If you can’t get a business loan, look to the personal or consumer products CUs offers. Money is just money after all and CUs make getting your hands on that needed money (personal or business) easier.
3) Cheaper All The Way Around – As CUs are non-profit, they have lower application, origination and processing fees on their loan products. They have lower annual fees if any (say on lines of credit). And, they usually charge lower interest rates.
All items that do nothing but benefit you and your business. Why over pay when you don’t have too?
From MyCreditUnion.gov credit unions offer:
Fees and loan rates at credit unions are generally lower, while interest rates returned (dividends paid on deposits) are generally higher, than banks and other for-profit institutions. Credit unions are democratically operated by members, allowing account holders an equal say in how the credit union is operated, regardless of how much they have invested in the credit union.
As I have hoped to point out here, if you already have a relationship with a local bank, then by all means approach that bank for your business loan needs. But, if you don’t or if they turn you down, there is no reason that you cannot just drive right over to one of your local credit unions and see if they will say yes to your same request.
Credit unions offer a lot of benefits when it comes to business financing, namely being easier to qualify for. So, in the end, does it really matter where or what form your business loan come in? Money is just money after all.
Cheap Business Loans?
When most entrepreneurs begin the process of seeking a business loan, one of the first concerns that occupy their thoughts is the price of the loan – namely the interest rate they will be charged.
As you already know, just getting a lender to consider your business loan request is hard enough these days – but, to get one to provide your business capital at a rate that you feel is the most beneficial to your operations is down right impossible.
Every day I get requests from entrepreneurs (start-up or established business owners) who want to know where they can get a cheap business loan.
My answer is always the same – define cheap.
No loan is cheap but on the other side no loan is expensive either – if it is put to proper use.
The difference between a few percentage points on a loan is no where near as meaningful as what is done with the loan proceeds. Business loans are meant to be a leveraging asset – meaning that you leverage current cash flow to obtain a loan then use that loan to generate more in new revenue than the loan costs.
Thus, a loan is only an asset to be used by a business in its operation or quest to generate more income and wealth.
Let’s take a simple example:
You and another local competitor have identified a market niche that could potentially create new uses for your current products. While this market is yet unproven, you both believe that it has tremendous potential.
You go to your lender seeking a business loan for $100,000 for three years. The lender agrees and quotes a rate of 10%; making your monthly loan payment approximately $3,227.
You feel that this rate is too high given the long relationship you have had with this lender and all the money you have paid to them over the years. Plus, you spent a few hours online researching that the average business loan rate is around 8%.
Your lender states that he might be able to get your rate reduced to 8% but you will have to wait until their next loan committee in two weeks to get it approved.
At 8%, you monthly loan amount would be approximately $3,134 – a $93 per month savings or $3,351 over the life of the loan over the 10% rate for the same amount.
In the mean time, your competitor goes to the same lender and receives a loan quote for the same amount at the 10% rate. Your competitor takes the deal.
By the time the loan committee approves your 8% rate – your competitor has already executed its marketing plan for this new market, has created demand for its products and is now generating an additional $10,000 per month in new revenue from this niche.
Once your loan is funded, you attempt to execute your marketing plan but find that you are a bit too late and your business is only able to generate $4,000 per month in additional revenue (your product is seen as a copy cat to the new market leader – your competitor).
While this new revenue pays for the loan – the new revenue generated for your business is still some $6,000 per month lower than your competitor.
Let’s look at the difference. Over three years, the total amount that you have to repay for the loan is $112,811 ($3,134 times 36 months). Your business brings in $4,000 per month for those same 36 months and you earn $144,000 with a net profit of $31,189.
Your competitor spends more on his loan – $116.162 – but earns some $360,000 or net profits of $243,838 or 782% more than your business all because you wanted a cheap loan.
The bottom line here is that the cost of the loan really did not matter here. The price that your business paid for not getting into this niche before your competitor is much higher (a loss of some $6,000 per month in revenue) then the $93 per month you saved.
If you compare his rate of 10% to the profit he made of some $6,773 per month ($10,000 – the monthly payment) – his loan really was the cheaper one.
And, it really doesn’t matter if you actually had a competitor trying to beat you to the market. There is an opportunity cost of not taking a business loan or by not getting it when the time is right.
Even if you were just delayed a few weeks while fighting for a lower rate – the amount of income that you lose by waiting (an amount that you can never make up as time does not go backwards) would exceed the amount you were trying to save – in this case, (if you did not have a competitor beat you to the niche) waiting two weeks would cost about $5,000 in new revenue while you were only getting a savings of $3,351 at the lower interest rate.
Now, I am not saying that you should not try to get a better deal or lower interest rate but, make sure that by doing so you are not giving up more then you are trying to save.
Thus, while you squabbled over a few percentage points looking for that so called cheap business loan, the price you paid for not getting your loan on time by far exceeded any potential savings.
The idea is not to try to seek a lower interest rate business loan just based on the loan itself. The whole deal (both potential and costs) have to be analyzed to fully understand what is a cheap business loan and what isn’t.
Choosing the Right Business Loan For Your Company
Operating a business takes money and just about everyone has heard the expression you have to spend money to make money, but where do you get the money if you aren’t independently wealthy, or established? A business loan is the answer to most business needs. It doesn’t matter what size a business is, almost every business owner at some point has to consider a loan. A business loan can help a business get started, expand once it’s on its way and growing, or get a business through the tough spots that happen occasionally. Deciding on a business loan is a key step, but which loan is right for you and how do you decide between the many different various types?
Skip the Loan and Use Plastic
Some business owners opt for a slight variation on a business loan and choose to use credit cards to back their startup, expand on an existing business, or help their business through a tough stretch. The positive reason for using credit to fund your business is that it is often easier to get, or already existing in a personal credit card, but there are a couple of serious negatives to using this type of business financing. The first negative is that unless your existing credit line is unlimited there might not be enough funding on your credit cards. The second negative to using personal credit cards is that your personal and business cash flow is not separate. This can create havoc if you need to use your credit for important personal needs and it can have a similar effect on business funds if you suddenly have to tap into your credit for personal reasons. Lastly, the interest rate on credit cards is normally much higher than any of the various types of business loans.
A Bridge Between Credit Cards and Business Loans: Lines of Credit
A line of credit operates much the same as a credit card. You apply for a business loan line of credit and based on your qualifications you are approved for up to a certain amount. You are not charged on the loan until you actually use the money and are only charged for the amount you actually use. Another similarity between lines of credit and credit cards is the loan is often an unsecured loan meaning no assets are used to guarantee the loan such as homes, cars, the business itself. However, unlike a credit card business lines of credit have interest rates much closer to a traditional loan level.
On the downside those interest rates are usually variable like a personal credit card and go up or down over the period of the loan. Another downside to lines of credit is that like a credit card your payments will usually be only a little more than the interest rate each month.
This may seem like a plus at the start because the monthly payments are so low. The catch there is that lines of credit to not extend forever. There is almost always a set number of years for the loan amount to be available. At the end of that time (and sometimes within the last two years of the payback) money is not longer available. After that period, the payments are higher to make sure the money is completely paid back by the end of the loan.
If you have the discipline to make yourself pay more than the minimum every month in order to pay down the loan, this can be a good loan to get. It allows for times when money is tight. You can pay the minimum at those times without risking a default on your loan.
Traditional Types of Business Loans
Even if you do not have an extensive amount of credit, and if you don’t think a line of credit is right for you, all is not lost. There are many more traditional styles of business loans to choose from:
– Working Capital Loans: These loans are what most people think of when they consider getting a business loan. They come in two types, secured and unsecured. Unsecured versions of working capital loans are usually only available to those business owners with stellar credit, a sound business plan, and an established business with a proven track record. Startups are usually too risky to be granted unsecured working capital business loans. Secured working capital loans are a little easier to get although the amount of collateral needed to obtain these loans is often based on the credit of the borrower. These loans make it possible for all types of business to conduct their affairs on a day-to-day basis with available cash. Loans are commonly secured with homes, and other valuable assets.
– Accounts Receivable Loans: These are short term types of financing available when you hit a tough spot and now you have money coming in at a particular time. Your business’ records of accounts receivable act as a security for such loans. On the downside the interest rates of these short term loans are usually higher than a long term standard loan, and you can end up in a vicious circle of using your assets (receivables) before you get them and then not have money left before your next income period. This type of loan should only be considered in a select few types of cases of emergency such as the need to meet payroll, purchase inventory at a value, or other necessities.
– Business Only Loans: This type of loan is applied for using the capital and assets of the business alone and not any personal credit or credit history of the owner. It is only available to a business with a solid record of reliable income, the long-term prospect of fluid operation, and very strong business credit scores.
Other Function Specific Loans
There are times during business operation when you need a loan for a specific type of purchase such as to buy new or replace old equipment, the purchase of real estate for the business, or other dedicated needs there are loans designed to be separately available for just those times.
Getting The Loan
The best way to ensure success in getting your business loan is to be prepared. Enter your bank with a well-formulated business plan in hand and make sure your credit is up to par. If you know of any spots on your credit history, be prepared to explain them. Lenders are human too, and know that there are situations that are unavoidable but if you can prove your trouble is in the past and you are on more solid footing it will help a lot in getting the loan you desire. Letters of explanation to go along with your loan package help if there were situations such as illness, or caring for a sick loved one that caused problems in the past.
One of the things that stops most people from attempting to get a loan is fear of rejection. Knowing what to expect can alleviate that fear.
Small Business Loan Update – Stimulus Bill Helps Bailout Businesses If They Cannot Pay Loans
As we continue to sift dutifully through the over 1,000 pages of the stimulus bill (American Recovery and Reinvestment Act of 2009), there is one provision that is not getting much attention, but could be very helpful to small businesses. If you are a small business and have received an SBA loan from your local banker, but are having trouble making payments, you can get a “stabilization loan”. That’s right; finally some bailout money goes into the hands of the small business owner, instead of going down the proverbial deep hole of the stock market or large banks. But don’t get too excited. It is limited to very specific instances and is not available for vast majority of business owners.
There are some news articles that boldly claim the SBA will now provide relief if you have an existing business loan and are having trouble making the payments. This is not a true statement and needs to be clarified. As seen in more detail in this article, this is wrong because it applies to troubled loans made in the future, not existing ones.
Here is how it works. Assume you were one of the lucky few that find a bank to make a SBA loan. You proceed on your merry way but run into tough economic times and find it hard to repay. Remember these are not conventional loans but loans from an SBA licensed lender that are guaranteed for default by the U.S. government through the SBA (depending upon the loan, between 50% and 90%). Under the new stimulus bill, the SBA might come to your rescue. You will be able to get a new loan which will pay-off the existing balance on extremely favorable terms, buying more time to revitalize your business and get back in the saddle. Sound too good to be true? Well, you be the judge. Here are some of the features:
1. Does not apply to SBA loans taken out before the stimulus bill. As to non-SBA loans, they can be before or after the bill’s enactment.
2. Does it apply to SBA guaranteed loans or non-SBA conventional loans as well? We don’t know for sure. This statute simply says it applies to a “small business concern that meets the eligibility standards and section 7(a) of the Small Business Act” (Section 506 (c) of the new Act). That contains pages and pages of requirements which could apply to both types of loans. Based on some of the preliminary reports from the SBA, it appears it applies to both SBA and non-SBA loans.
3. These monies are subject to availability in the funding of Congress. Some think the way we are going with our Federal bailout, we are going be out of money before the economy we are trying to save.
4. You don’t get these monies unless you are a viable business. Boy, you can drive a truck through that phrase. Our friends at the SBA will determine if you are “viable” (imagine how inferior you will be when you have to tell your friends your business was determined by the Federal government to be “non-viable” and on life support).
5. You have to be suffering “immediate financial hardship”. So much for holding out making payments because you’d rather use the money for other expansion needs. How many months you have to be delinquent, or how close your foot is to the banana peel of complete business failure, is anyone’s guess.
6. It is not certain, and commentators disagree, as to whether the Federal government through the SBA will make the loan from taxpayers’ dollars or by private SBA licensed banks. In my opinion it is the latter. It carries a 100% SBA guarantee and I would make no sense if the government itself was making the loan.
7. The loan cannot exceed $35,000. Presumably the new loan will be “taking out” or refinancing the entire balance on the old one. So if you had a $100,000 loan that you have been paying on time for several years but now have a balance of $35,000 and are in trouble, boy do we have a program for you. Or you might have a smaller $15,000 loan and after a short time need help. The law does not say you have to wait any particular period of time so I guess you could be in default after the first couple of months.
8. You can use it to make up no more than six months of monthly delinquencies.
9. The loan will be for a maximum term of five years.
10. The borrower will pay absolutely no interest for the duration of the loan. Interest can be charged, but it will be subsidized by the Federal government.
11. Here’s the great part. If you get one of these loans, you don’t have to make any payments for the first year.
12. There are absolutely no upfront fees allowed. Getting such a loan is 100% free (of course you have to pay principal and interest after the one year moratorium).
13. The SBA will decide whether or not collateral is required. In other words, if you have to put liens on your property or residence. My guess is they will lax as to this requirement.
14. You can get these loans until September 30, 2010.
15. Because this is emergency legislation, within 15 days after signing the bill, the SBA has to come up with regulations.
Here is a summary of the actual legislative language if you are having trouble getting to sleep:
SEC. 506. BUSINESS STABILIZATION PROGRAM. (a) IN GENERAL- Subject to the availability of appropriations, the Administrator of the Small Business Administration shall carry out a program to provide loans on a deferred basis to viable (as such term is determined pursuant to regulation by the Administrator of the Small Business Administration) small business concerns that have a qualifying small business loan and are experiencing immediate financial hardship.
(b) ELIGIBLE BORROWER- A small business concern as defined under section 3 of the Small Business Act (15 U.S.C. 632).
(c) QUALIFYING SMALL BUSINESS LOAN- A loan made to a small business concern that meets the eligibility standards in section 7(a) of the Small Business Act (15 U.S.C. 636(a)) but shall not include loans guarantees (or loan guarantee commitments made) by the Administrator prior to the date of enactment of this Act.
(d) LOAN SIZE- Loans guaranteed under this section may not exceed $35,000.
(e) PURPOSE- Loans guaranteed under this program shall be used to make periodic payment of principal and interest, either in full or in part, on an existing qualifying small business loan for a period of time not to exceed 6 months.
(f) LOAN TERMS- Loans made under this section shall:
(1) carry a 100 percent guaranty; and
(2) have interest fully subsidized for the period of repayment.
(g) REPAYMENT- Repayment for loans made under this section shall–
(1) be amortized over a period of time not to exceed 5 years; and
(2) not begin until 12 months after the final disbursement of funds is made.
(h) COLLATERAL- The Administrator of the Small Business Administration may accept any available collateral, including subordinated liens, to secure loans made under this section.
(i) FEES- The Administrator of the Small Business Administration is prohibited from charging any processing fees, origination fees, application fees, points, brokerage fees, bonus points, prepayment penalties, and other fees that could be charged to a loan applicant for loans under this section.
(j) SUNSET- The Administrator of the Small Business Administration shall not issue loan guarantees under this section after September 30, 2010.
(k) EMERGENCY RULEMAKING AUTHORITY- The Administrator of the Small Business Administration shall issue regulations under this section within 15 days after the date of enactment of this section. The notice requirements of section 553(b) of title 5, United States Code shall not apply to the promulgation of such regulations.
The real question is whether a private bank will loan under this program. Unfortunately, few will do so because the statute very clearly states that no fees whatsoever can be charged, and how can a bank make any money if they loan under those circumstances. Sure, they might make money in the secondary market, but that is dried up, so they basically are asked to make a loan out of the goodness of their heart. On a other hand, it carries a first ever 100% government guarantee so the bank’s know they will be receiving interest and will have no possibility of losing a single dime. Maybe this will work after all.
But there is something else that would be of interest to a bank. In a way, this is a form of Federal bailout going directly to small community banks. They have on their books loans that are in default and they could easily jump at the chance of being able to bail them out with this program. Especially if they had not been the recipients of the first TARP monies. Contrary to public sentiment, most of them did not receive any money. But again, this might not apply to that community bank. Since they typically package and sell their loans within three to six months, it probably wouldn’t even be in default at that point. It would be in the hands of the secondary market investor.
So is this good or bad for small businesses? Frankly, it’s good to see that some bailout money is working its way toward small businesses, but most of them would rather have a loan in the first place, as opposed help when in default. Unfortunately, this will have a limited application.
Wouldn’t it be better if we simply expanded our small business programs so more businesses could get loans? How about the SBA creating a secondary market for small business loans? I have a novel idea: for the moment forget about defaults, and concentrate on making business loans available to start-ups or existing businesses wanting to expand.
How about having a program that can pay off high interest credit card balances? There is hardly a business out there that has not been financing themselves lately through credit cards, simply because banks are not making loans. It is not unusual for people to have $50,000 plus on their credit cards, just to stay afloat. Talk about saving high interest. You can imagine how much cash flow this would give a small business.
We should applaud Congress for doing their best under short notice to come up with this plan. Sure this is a form of welcome bailout for small businesses, but I believe it misses the mark as to the majority of the 27 million business owners that are simply looking for a loan they can repay, as opposed to a handout.
Secured Business Loan – Providing A Conducive Atmosphere For Business Growth
The amounts that a business will need as a business loan will generally be large. Unless, it is a bank that has utmost confidence on the borrowing enterprise, most banks and financial institutions will balk at the idea of lending a large sum to enterprises without any guarantee. This explains the genesis of secured business loans. A secured business loan is one where the borrowing enterprise pledges loan repayment by offering the loan provider a lien of certain asset/ assets.
Borrowers do get business loans without having to pledge any such lien to the loan provider. These are known as unsecured business loan. However, such opportunities are not easily available. And if they are, the terms on which they come are very expensive. The APR that borrowers of the latter category will have to shell is many percentage points more than the Secured business loans borrower.
Would you, as a borrower of business loan, unnecessarily increase the cost of finance to your business, knowing well that the assets are being pledged and not sold out? The assets pledged in secured business loans are available for use by the borrower. It is only when the loan is not paid in full that the loan provider undertakes to repossess the asset forming collateral. Is it that the creditors of unsecured loan do not demand repayment if the borrower doesn’t pay. In this case, the loan provider has to demand repayment. Since they do not have a direct stake on any asset of the borrowing enterprise, they will seek support from the courts in the recovery process. Often the borrower has to cough up the amount. Additionally, the borrower’s credit history is tarnished because of these proceedings.
Secured business loans, thus is the safest bet for both the borrowing entrepreneur and the loan providers. Loans in this category will depend more on the value of collateral and the lending organisation chosen. Maximum amount can be had through a secured business loan.
Since the secured business loan has been used specially for use in business, one is able to better mould the business loan. One can use the business loan in a variety of purposes. Ranging from the daily requirements in the form of working capital, the business loan can also be used for expansion purposes.
Certain loan providers would insist on the borrowing organisation to fulfil certain preconditions in order to approve the loan application. Certain preconditions form standing orders that are applicable for the entire term of the secured business loans. For instance, loan provider will stipulate that the debt- equity ratio (the ratio of debt to equity in the capital) be kept to a particular level. Such preconditions amount to reduction in entrepreneur’s control over his business. Lender may demand immediate settlement of the secured business loan if at anytime the condition is not met. The borrowing enterprise must discuss well with experts about the implications of such clauses, before consenting to loan deals.
As against individuals who would have to repay the loan through fixed monthly or quarterly instalment, entrepreneurs get to repay the loan through repayments that are flexible. Entrepreneurs, owing to their fluctuating income structure, get to pay through instalments that are not fixed. In periods when the business is going strong, the entrepreneur will pay a major part of the loan. This will be used as a pretext to smaller payments or payment holidays, as the case may be.
Online processing of loans has caught up with secured business loans as it has with the personal loans. An entrepreneur planning to draw a secured business loan shall simply fill up the loan details and initiate the process of approval. The web technology is used by a few borrowers to compare between a number of loan deals available. The loan providers short-listed are requested to send a loan quote defining the terms of the secured business loan. This is a very important and effective technique of drawing information about the pros and cons of loans.
Proper planning must precede any decision to draw a secured business loan. The business not only has an asset on stake, it is also the reputation of the enterprise that is tarnished when the business does not pay in full. Since a business is always in need of finance, it cannot afford to lose on reputation. This will make things difficult when the enterprise is again in need of loans. They will have to do with business loans on stricter terms because of the bad credit history. Businesses must thus decide the use or need of secured business loan beforehand.
A Small Business Loan Is Easy to Get If You Are Doing the Important Things Right
When your business is in its starting phase, you need a loan to grow it. Yes, there are ways for you to start your business with very little capital, but even in the age of the internet you need loans for the growth and expansion of your business. Oftentimes, startup and small business owners are scared of taking loans because they believe returning the same loan with interest on it will hinder their growth. The fact is a loan is not such a big liability if you have done your homework before getting it. Hastily getting a loan without researching the market and knowing your business’ growth potential can be detrimental to the business.
Your Business Plan Matters Big Time
It does not matter how experienced your management team is when your business plan is weak. When you ask for a loan from lenders, they are trying to find reasons to forward you the desired loan. They want to be sure that the loan they forward is returned in time and according to the terms and conditions set at the time of loaning. Lenders will seldom gauge the potential of your business to return the loan based on what you speak. What they want to see is a solid business plan and that’s why you need to have an impressive one. A strong business plan will consist of the following and some more.
- The company description
- Management role and experience
- The product description
- Strategy for marketing
- Financial projections
- An executive summary
- Documented cash flow
Keep in mind that banks often look at the cash flow in the documented form, and their scrutiny is not limited to what your projections are for the future but more importantly how you have managed things in the past. They will look at your company’s cash flow records for past couple of years to see if you should be given the loan you are asking for. So, keep your business plan in mind and make sure you have worked on every aspect of it to present something impressive to the investors.
Your Loan Options Are Many
Sometimes, you have a solid business plan and everything else is in place, but your understanding of loan options is not at its best. Many small business owners live with the impression that the only institution available to them for obtaining a loan is a bank. That’s far from truth because there are dozens of other ways to obtain the loan or investment for your startups that’s much easier to manage than a bank loan. Some of the options available to you include SBA loans from the government, invoice financing, business equipment financing loans, etc. If you are just a startup and none of those options seem viable to you, there is online fundraising.
Online fundraising has become quite a popular method of getting investments for your startup from individuals who trust in your idea and concept of the business. Using funding website you have access to hundreds of thousands of investors located all around the world that are willing to help if you can convince them with your business plan and the team that’s behind your project. So, avoid making the mistake that many small business owners make when they think bank is the only place for them to get any money for their businesses.
Your Timing to Apply for a Loan Is Important
This is a huge mistake that small business owners often make and pay the price in the form of not being able to obtain the loan they want at the terms they want. See, you will always be told to have a strong business plan because that’s the only way investors will trust you as an entrepreneur or businessperson. When you create your business plan, you are not just jotting down random numbers on a piece of paper. Your plan should give you an idea of what your business’ needs will be in the coming times. That’s when it makes sense to apply for loans well in advance and not at the eleventh hour.
When you apply for a loan at the eleventh hour, you are seen as a business in trouble. Most investors will see your business as the sinking ship and they will never want to get on it. Obtaining a loan in these circumstances can become close to impossible. This is the reason why you should apply for a business loan in advance and not at exactly the moment you need it. You also have to keep in mind that loan approval process takes time too. If you need the cash on an urgent basis, every day that passes during the approval process will be causing more damage to your business.
The Right People Can Make the Difference
Delegating responsibilities to the right people is an art and skill that not many business owners have. Oftentimes, small business owners rely too much on their own skills and are scared to trust any other person to do things for them. This can be a grave mistake because you cannot be the jack and master of all the trades at the same time. For example, you might be great at crunching numbers and making accurate projections for the business but not very great at sales and pitching ideas. If you have to pitch your business idea, its marketability and scope to the investors, choose the person who can best present it. Despite your great business plan, you will fail to obtain a loan because of your nervousness and lack of confidence when it comes to acting like a clever salesperson.
You have to bear in mind that investors are not investing only in your business, they are also investing in you. It is very important for them to like your personality to invest in your project. Appearing unprepared or nervous in front of them will send an impression that you are not fit to lead the project, your decision making is faulty and that you cannot create strong teams.
A Well-prepared Presentation Can Win Hearts
It does not matter who is giving the presentation when the content is boring and does not address the points that investors are most curious to know. First, get your numbers straight and bring them into the presentation at the right points. Be the investor in your mind and think of the questions you would ask if someone presented the same product/service to you. Have your accountant, advisor and business lawyer by your side when preparing the presentation. You don’t want to give wrong figures during the presentation and fall for a bad deal at the end of it. The most important thing is to explain your business idea as clearly as possible. Many times the presentations are so all-over-the-place that investors can’t make heads and tails of it. If they don’t understand your business, they will never invest.
So, bear in mind that obtaining a loan is not that big of a challenge. Most of the times, it is just some small mistakes in the areas mentioned above that become the cause of lost opportunities to get the right loans for your business. Create a solid business plan, choose the right people to represent your business and use all the options that are available to you at the right time to grow your business at the pace you want.
Business Loans – Information for Business Owners
A business loan provides financial aid to business of all sizes (i.e. small businesses, medium-sized businesses or start-up businesses). It is ideal for business owners who need funding to enhance or expand their business. When you need a loan for your business, you must adopt a strategic approach. Cautious planning is necessary for ensuring success in obtaining business loans.
When you are considering applying for a business loan, it is important for you to take enough time to create a convincing and detailed business plan. Your business plan should include information, which will assist your finance broker as well as the lender/credit provider in providing you with the right type of finance and advice. Here is a list of information you should include in your business plan:
- Your business structure
- The purpose and goals of your business
- Your past and future plans for your business
- The profit and loss projections and cash flow forecasts of your business
- Your marketing strategy (i.e. the products or services your business provides)
It is also important to state in your business plan the specific purpose for which you want to use a business loan.
Decisions to Make
Once you have assessed your needs for a business loan, you should investigate which finance products suit your needs for a business loan as each loan has varying features for you to choose. To help with this process, here is a list of things to consider and which you can discuss with your finance broker:
- The loan amount required
- The loan term (i.e. the period in which the loan will need to be repaid)
- Interest rate type and repayments (i.e. fixed or variable)
- Loan fees, and
- Loan security (i.e. the type of security offered by you)
There is a variety of business loans available to choose from. Here is a brief summary of common business loan products specifically designed by lenders/credit providers for business owners, which can assist your individual situation as a business owner:
Commercial Bill Facility
A commercial bill (also called a bank bill or bill of exchange) is a flexible credit facility that can give your business a short-term or long-term injection of cash. The finance provided by the commercial bill can help your business in the event that you may need to solve an unexpected or urgent problem, and you do not have the required cash flow. You agree to pay back the face value of the commercial bill plus interest to the lender/credit provider on a specific maturity date.
The purpose of establishing an overdraft facility is to provide working capital for your business in the short-term, before receiving income. An overdraft facility should not be used for capital purchase or long-term financing needs. The overdraft is a normal trading account facility for your business, whereby the lender/credit provider permits you to use or withdraw more than you have in the trading account. But, only up to an agreed amount and any negative balances typically need to be repaid within a month.
Line of Credit
A line of credit (also called an equity loan) can provide access to funds by allowing you to draw an account balance up to an approved limit. The loans are designed as a long-term debt facility and are usually secured by a registered mortgage over a property.
Fully Drawn Advance
This is a term loan with a scheduled principal and interest repayment program. The loan provides access to funds upfront, which can be used for funding long-term investments that will expand the capacity of your business, such as purchasing a new business or even purchasing equipment. Fully drawn advance loans are usually secured by a registered mortgage over a residential or commercial property or a business asset.
A short-term loan can provide short-term funding needs for your business. You can take out a short-term loan if you want to take advantage of a very quick financial opportunity or to help you get out of a financial cash flow crisis. The loan offers a fixed sum advance and requires a periodical interest charge to be paid by you. Short-term loans typically require a security to be provided.
Business Equipment Finance
If you decide to expand your business operations and take benefits of potential tax advantages, you should consider taking out business equipment finance, as the finance arrangement allows you to buy, lease or hire a new vehicle or specialised equipment (e.g. cars, trucks, forklifts, printing, computing, medical and office equipment as well as plant equipment and machinery). Typical finance arrangements to consider for business equipment finance are asset lease, commercial hire purchase, chattel mortgage or equipment rental.
Truly, there are several finance products available in the market to help business owners. When you seek out finance for your business, don’t be in a hurry. Consider all the alternatives in detail and then choose the one that is right for you and your business.
An Outline of Personal and Business Loan Categories and Their Uses
The number of loan products have increased over the past 20 years as economic necessity and a demanding public in need of specialization to solve financial circumstances. From personal loans, educational loans, business loans and even municipal loans. The entities that took part in the creation of the various financial products are actuaries, risk management professionals, “information and informatic engineers” and Wall Street amongst others. It was necessary to create, enhance or break down for better or for worse loan services and products to keep money fluid in a diverse marketplace that required funds to address niche demographics.
- Personal Loans
Signature Loans – A signature loan is just as it sounds. One applies for a loan and gives a signature on a promissory note to repay the loan in a certain amount of time. That amount of time is called a “loan term ” and may be from six months to five years. Signature loans usually require good credit and the criteria for loan approval are mostly based on the borrower’s credit and and to a lesser degree on assets. Not all signature loans have the same parameters for qualifications. Some loans may require the borrower even with good credit to account for assets to show the lending institution for underwriting purposes. The institution may or may not place a lien on the assets but nevertheless wants to have documentation proving that there are indeed financial or physical assets owned by the borrower. Signature loans usually come with lower interest rates than other types of consumer loans like payday loans, credit card advances, title loans and some car loans. More on these topics later. Who are the lenders in signature loans? They range from large subsidiaries of auto manufacturers to banks, savings and loan institutions, finance companies and payday loan companies.
Credit Card Loans – Credit Card loans or cash advances from credit cards are another form of personal loans. These quick loans are more readily available to the general public and does not require a credit check. To obtain the initial card more than likely required a credit check or at least the process of identification for secured credit cards. Credit card loans or advances usually come with higher interest rates and also other fees for having access to the cash. Various entities allow access to the credit card cash advances from bank tellers, check cashing facilities and automated teller machines (ATMs). The fees vary based on source used to access the funds. To lower the fees for cash advances some use check cashing facilities to have the card charged and receive cash back in turn for not having to incur the fees of ATM machines as cards are assessed a fee twice; first by the ATM company and also their bank. The interest rates on credit card loans or advances are usually higher than signature loans. There are some states that have usury laws that have lower interest rates on credit cards. The loan or advance on a credit card is not a “term loan” as with most signature loans. It is more or less a line of credit the borrower has access to when they need it as long as there are funds available on the credit card. Interest on consumer loans are no longer tax deductible as in previous years. They were designed for short term borrowing needs but many have come to use their credit cards as a regular source of funds in tight economic times or between paychecks.
Wedding Loans – A relatively new form of loan to carve out a niche for the lending industry and meet the needs of the increasing costs of weddings is the Wedding Loan. Because of the expense of weddings which can range into six figures, it sometimes requires a personal loan or even a business loan of the families involved to provide a proper wedding. Wedding loans can be secured (using assets for collateral) or unsecured (signature loans) to obtain funds for the ever growing need to pay for the escalating wedding costs and all the various services and products that a successful matrimonial ceremony would need. The credit criteria and the term may vary based on the amount needed and financial status of the people involved.
Payday or Cash Advance Loans is a fast growing market because it usually requires the least of credit criteria used for loan approvals. One can have bad credit for a quick and instant loan. Just having proof of income, proof of identity and a checking account is all that is necessary to secure funds. Even today many have checking accounts without checks one can still obtain a cash advance by asking their bank to produce a one time check to give to the payday loan agency. Many payday loan companies and stores can get approval with no faxing of documents as they utilize other means for proof of income. Although payday loans come with very high annualized interest rates they sometimes are the only source of emergency cash loans for those in need.
Automotive, Motorcycle, RV (recreational vehicle) and Boat Loans – These personal consumer loans are usually not signature only loans but asset based loans. In other words a financial lien is placed against the asset to secure a loan to purchase or refinance the car, boat et al. These consumer loans may sometimes require a down payment of five to twenty-five percent to secure enjoyment and use of ownership. Because these are not funds that are already available as with credit cards they come with a “loan term” from one to six years depending on the choices of the consumer, the marketplace and the credit status. The interest rates can range from very low usually offered by manufacturers of cars, motorcycles, RV’s (recreational vehicles) and boats to very high if the borrower uses a credit card, a finance company or a “buy here – pay here” lender – or the car dealer who finances the purchase of the car by giving the borrower a term of months and years to pay the balance of the loan off.
- Business Loans
SBA (Small Business Administration) Loans are loans that are given to small businesses which are not able to qualify for a loan from a financial institution for various reasons from lack of business history, lack of collateral to “secure” the loan or not having an adequate credit history. The SBA is not a direct lender but acts as an underwriter on behalf of the bank that funds the loan for the business entity. If the borrower defaults on the loan the SBA will pay the bank a percentage of the balance for taking the financial risk to loan the funds to the business. There are various types of SBA loans which will not be covered in this article but a future article will explain in more detail.
Conventional Business Loans are loans that are either unsecured meaning no asset is used to approve the loan or secured and called “asset based loans” where assets from inventory, equipment, accounts receivable or real estate are used for underwriting for loan approval. Conventional business loans are given to business entities that have great banking relationships, established business credit history with trade lines with other businesses they do business with and good standing with various credit reporting entities like Dun & Bradstreet. There are short term loans with interest only payments with the balance due at the end of the loan usually referred to as a “Balloon Loan”. There are also longer term loans that are fully amortized (principal and interest in each payment) paid over one to five years or more.
Equipment Leasing is a financial instrument which technically is not a loan. Meaning based on tax ramifications and who owns the equipment – leasing is just that – leasing an asset owned by another entity. Leases are usually from large corporations or a bank. The lease term can vary from one to five years or more and there usually are tax benefits to the business entity in leasing new or used equipment.
Equipment Sale Leaseback is a transaction to use equipment that is already owned by the business or municipal entity to secure funds for the present need for operations. The term can vary from one to five years and the amount of funds can vary based on credit history and a percentage of the fair market value of the equipment. The company then in turn leases the equipment back in usually a monthly payment. The company or the lessee normally has different choices on what they want to do with the equipment at the end of the term. They can roll the lease transaction into newer more updated equipment or software. They can buy the equipment for one dollar or ten percent of the fair market value of the equipment.More and more companies are leasing today as opposed to paying cash or using bank lines or loans.
Merchant Cash Advance is used by businesses that need fast cash and can’t qualify or don’t want to go through the process of getting bank approval for needed funds. A Merchant Cash Advance is also not a loan product but it is the selling of assets or credit card receipts at a discount. In other words the Merchant Cash Advance company buys the credit card receipts and then attaches a fee usually every time the business “batches”, settles or closes the day’s or week’s sales until the funds advanced are paid off. There is no term with merchant cash advances as it is not a loan so there is no set payment amount or period. The paying off of the advanced funds vary based on a the credit and debit card transactions of the day or week.
Factoring Accounts Receivable Invoices enables a business entity that normally has to wait 30 days or longer to be paid by other businesses or governmental entities. Again factoring is not technically a loan but a selling of invoices at a discount for cash now. In a typical transaction the company applies with a Factoring Company and the company looks primarily at the credit of the other business or governmental entity that the company is doing business with. Based on that as long as the client of the company is a solvent business or government agency the invoices are bought and funds are dispensed to the business usually within three days of due diligence on the company they are transacting business with. In other words the funds are dispensed after there is a credit check and processing of the other company. The dollar amount that is advanced can vary from fifty percent of the invoice to eighty or ninety percent depending on various factors such as the size of the invoice to the credit criteria of the other company or governmental entity whether it is a city, county, state or federal agency.
Medical Factoring is a financial transaction that benefits medical entities like hospitals, clinics and various health care professionals that have to wait to receive funds for services performed on patients. Like Factoring and Merchant Cash Advances Medical Factoring is the selling of assets in this case invoices for cash now. In many instances the health care industry receives payment from third party entities like insurance companies, Medicaid and Medicare and state entities that provide funds for those in need of medical procedures. The medical facility or professional in turns sells the invoice(s) on a on going basis or one time for cash now. Once there is an interest is selling the receivables then a Factor steps into analyze the billing so that funds can be advanced. This process can vary in length but is usually shorter in length than the process of getting bank financing.
Contract and Purchase Order Funding allows companies to bid on large projects for governmental agencies, hospitals, universities, prison systems and municipalities or also to sell to larger corporations even if the business does not have the credit or bank approval or the wherewithal to service or fulfill a large contract order. Similar to Factoring which works hand in hand with Purchase Order Funding it is not a loan but a simultaneous transaction that involves advancing funds based on the credit of the governmental agency or larger company and the size of the contract. The funds that are advanced are for the cost in completing the order of products or performing services. So the profit that will be gained is not advanced but the costs as in raw and finished material, transportation, production, labor, expertise and any other costs involved in completing the contract. Once the contract is completed or once an invoice is ready to be sent to the client a factoring company which is sometimes owned by the same company buys the invoice at a discount and the funds that would normally be advanced to the company are usually used to settle the amount advanced for the material and other services that were needed to complete the order. Contract and Purchase Order Funding usually requires large transaction amounts as opposed to factoring that can be utilized for invoices as small as one hundred dollars. With the use of Contract and Purchase Order Funding companies that were locked out of the process of bidding on large contract s may become players in multi-million dollar deals.
Commercial Real Estate Sale Leasebacks are similar to Equipment Sale Leasebacks featured in this article. Instead of utilizing owned equipment to secure cash when bank borrowing is not wanted or not available the commercial real estate is used to access funds now. This can vary from office buildings, medical buildings, retail franchises, industrial buildings and manufacturing to large utility plants. This frees up cash “locked” away in real estate. Many entities find that at the present time the business they are in whether it is retail, manufacturing or another field that the holding of commercial real estate is not in their best financial interest for now. They prefer to put to use funds for their industry. So a retailer selling retails goods decides to focus on the retail operations and to lease the space because that real estate when factored into a myriad of calculations does not fit their financial goals during the present time. Yes the ownership of commercial real estate is an asset and can be used as a security for a loan but may also be viewed as a fixed non-performing entity that does not meet the needs of the business, organization, group or individual that owns the building. Commercial Real Estate Sale Leasebacks are another form of getting access to funds and has increased over the years.
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SBA Small Business Loans – A Huge Benefit to Start-Up Businesses
Setting up a new business is never easy. There are innumerable details that need to be taken care of. Start-up businesses are mainly dependent on loans for almost all their business requirements. It is therefore extremely important to find an appropriate and reliable lending source to cater to their financial needs. However, since most conventional lenders and banks are not keen on providing loans to new business owners due to various security reasons, opting for SBA small business loans can be an excellent idea.
Small businesses can contribute immensely in developing and enhancing the nation’s economy. The Small Business Administration (SBA), which is a United States government agency that provides loans to small businesses with the aim of improving the country’s financial condition. These loans are meant to support the establishment of small businesses by providing through adequate financial assistance. These loans cannot be obtained directly from SBA, but through a number of their lending partners working in accordance with the SBA rules and regulations.
The SBA offers a wide variety of loans that demand different qualifications of the borrowers. The various financial programs offered by SBA such as surety bonds, debt financing and equity financing are designed to cater to the different financial requirements of borrowers. In order to avail a loan from them, it is extremely important to understand how the SBA works. Let us discuss some basic rules and regulations of the SBA:
- The SBA loans are provided to business owners at a lower interest rate than banks and other conventional lending sources owing to the fact that start-up business owners do not have adequate capital to opt for loans with high interest rates.
- SBA does not provide loans to small business owners directly. Instead, they merely set certain rules and regulations that are strictly followed by their partners, including private-sector lenders, micro-lending institutions and community development organizations, who are authorized by the SBA to provide loans to start-up businesses.
- The loans are provided to the business owners under an SBA guarantee to ensure that the loan is repaid on time to the lending partners. Business owners cannot avail SBA small business loans in case they have the eligibility to obtain loans from other lending sources on affordable and reasonable terms.
- You can obtain SBA loans fast and without any kind of hassles. They can be acquired on an immediate basis as soon as they are applied for. This can be immensely beneficial for start-up businesses that need financial assistance for all their business needs. Delay in acquiring loans can create problems for them in setting up the business.
- One of the most beneficial aspects of SBA loans is that they can be availed even if you have a poor credit record including bankruptcy, insolvency, IVA etc. It can be an excellent way to improve your credit records.
- SBA offers various kinds of loans, including 504 for purchasing real estate and equipment, 7 (a) for common small business loans, disaster loans and microloans. Not all banks issuing SBA loans offer the same loan programs. Moreover, in accordance with individual bank policies, the loan requirements for a particular program can differ from bank to bank.
The SBA rules and regulations for small business loans are designed to help start-up business owners and can be extremely beneficial for them.
SBA Small Business Loans and How They Can Be Used
Small Business Administration (SBA) business loans come in several sizes and forms. Of course, the SBA does not actually “loan” the money, they only “guarantee” loans made through banks and other financial institutions. However, depending on the size of your business and the stage your business development is in, one of the SBA business loan programs may work for you.
The first thing you need to determine is whether or not the SBA considers your business a “small business”. It is generally thought that the standard of 500 or fewer employees comprises a “small business.” However, that is not always the case. The SBA has definitions for small businesses that run from a maximum of 100 employees to 1,500 employees…and from a maximum of $0.75 million in annual revenue, to $27.0 million in annual revenue.
So, your first job is to determine if your business is really considered a “small business.” You can do this by contacting your local SBA District Office, or online at sba.gov.
The 7(a) SBA loan
The most popular of SBA business loans is their 7(a) loan program. Money from this loan can be used for just about any business purpose, and you should apply for this loan through your regular bank. You will need to present a complete business plan when you make your application. Even though the SBA does not make the actual loan, you will have to follow the SBA loan application process.
What this means is that both the bank and the SBA must approve your loan. Both you and your business (if it is currently operating) must have a good credit standing when you make your application. Also, if your bank turns down your loan application–that’s it…there is nothing the SBA can do at this point to help you. Your best bet then is to improve your business plan and look for another bank.
CDC/504 SBA Loan
This is a well-used program, but it is used strictly to purchase the assets of a business, or to pay for physical improvements. The money cannot be used for working capital, refinancing, or repaying debt. This loan program must also be handled through your bank (or other financial institution), so that is where you should start.
This program was intended for short-term loans, with a maximum of $35,000. The SBA has designated only certain lenders to process these loans. This specific program has not worked well because of the excessive paperwork and government bureaucracy, but it is always worth discussing with your banker, or your nearest SBA District Office.
Export Express Loan
The SBA export express loan is for those small businesses that have problems financing exports…usually due to the lengthy time required to process typical export loans. In this program the SBA guarantees up to 90 percent on export loans and gives an approval response in less than 24 hours. Eligibility is the same as for 7(a) loans, but you must have been in business for at least 12 months.
Community Express Program
This is currently a very popular program because Sam’s Club has partnered with an SBA business lender to provide low interest rate loans to smaller businesses. The minimum loan is $5,000 and the maximum loan is $25,000. You can actually make an online application for this loan at samsclub.com (click on Services). The program was initially set up to make quick decisions on loans in “underserved” communities, and was then expanded through the “Community Reinvestment Act.”
That is a brief overview of the major programs for SBA business loans. Most of these programs can be reached through your local bank, or directly from your local SBA District Office.