What is a SBA Loan?

The Small Business Administration (SBA) is a federal agency dedicated to helping entrepreneurs improve their small businesses, take advantage of contracting opportunities, and gain access to small business loans. However, one common misconception is that SBA lends money to businesses. For the most part, that’s not true. The agency does not directly lend money to businesses. You actually get an SBA loan from a bank that participates in SBA financing. The SBA guarantees a percentage of those loans to the banks, so financial institutions have more incentive to lend money to small businesses because of this guarantee, bankers may be more willing to lend you money even if you don’t fit their strict credit criteria. But at many major banks, getting an SBA loan can still often be a complex and lengthy process that can take several months. Lenders will want to review your credit and financial statements and expect you to have collateral to secure the loan. So even with the government guarantee, many small businesses may not qualify for SBA financing.

If you would like to apply for an SBA loan, expect to complete an extensive loan application, plus provide documents such as financial statements, information on your collateral, a description of your business, and a statement of how you’ll use the loan proceeds. They will look for applicants with good credit, a solid business plan, collateral, and a demonstrated ability to repay the loan. You’ll also have to choose which SBA loan program you’d like to apply to. The most popular programs are the SBA loan which can be used for many general business purposes and the CDC/504 loan, which is most often used to purchase major fixed assets such as equipment and commercial real estate. If you are unsure which program is right for you, Fundera can walk you through your options and help you quickly determine if you might qualify for an SBA loan.

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Concept of Credit Cards

Credit cards serve many useful functions, including the ability to pay for purchases when you don’t have cash on hand. The credit card issuer essentially loans you the money to make the purchase, and you will be able to repay that loan at a later date while being charged a certain interest rate. Most credit card loans are unsecured loans, meaning you have not used any property as collateral for the loan. Thus, if you default, the credit card issuer has no immediate way to recoup its loss. That requires the issuer to make a careful decision on who is and is not awarded a card, based on such factors as credit rating. Some borrowers with no credit history or a poor credit history can still get a “secured” credit card loan, meaning that they must provide collateral, which the credit card company can then collect if the borrowers default on the loan. The collateral usually takes the form of a cash deposit in the amount of the credit line. For example, if you deposit $1000 cash collateral, you will have a $1000 credit line.

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Most credit cards are issued with a credit limit, the maximum amount that can be borrowed at one time, including any interest or fees. This limit is variable, at the discretion of the lender, and a borrower in good standing is able to request an increase evaluation. If a borrower does not keep up a strong pattern of use, on the other hand, the lender may opt to decrease the limit, reducing the maximum possible loan. One of the most important elements of a credit card is the annual percentage rate of interest that you pay on purchases. This is what the credit card company charges you to loan you the money to use when you shop. An annual percentage rate is a variable rate that can range from a zero percent promotional rate, meaning no interest charge, to as much as 29.99 percent if you fail to make the minimum payment on the card on time, or have other credit issues.

Today, many people use credit cards as a form of money when spending. Thus, there are a lot of banks who offer various perks and benefits through credit card loads and even credit card debts. One of the usual credit card loaners are the Japanese comfort women due to the fact that most of them are already old an jobless, they try to find their own way of living by seeking enough capital from loans.

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Loan for Startups

If your new business is like most startups, you’re seeking somewhere between $5,000 and $50,000 to get it off the ground. After exhausting your personal savings and loans from relatives and friends, your first instinct might be to get a bank loan or an Small Business Administration (SBA) loan. Before you act on this instinct, let me tell you about three common misconceptions about bank financing for business startups.

1. If you need money, you can get a loan from the SBA. Type “SBA loan” into Google, and you’ll find hundreds of websites purporting to facilitate loans from the SBA. The fact is, the SBA doesn’t make loans. Visit the SBA’s website, and it clearly states that the organization is not in the business of making loans. Instead of direct lending, the SBA provides credit guarantees to banks and other institutional lenders who provide loans to business owners. The credit guarantee enables banks to make loans that are somewhat more risky than they would otherwise make. In the past year, there have been many new developments regarding SBA financing including the proposed elimination of the Microloan program for loans under $35,000. If you’re seeking a small loan, you should be aware of these developments by reading about this topic before approaching your banker to request a loan application. Typically, the SBA guarantee cannot by used by startup businesses without three years of sales history.

2. If you don’t score high in each of the four “C” of credit, you can forget about getting a bank loan. Forget about the four C’s of credit. In the past, banks made credit decisions based on a loan applicant’s credit history, cash flow, collateral and character. Today, most financial institutions ignore three of the four “C”. They tend to focus only on your credit history in evaluating your creditworthiness. There are several reasons for this shift, but perhaps the most significant is the increased automation of the underwriting process at banks. It simply takes too long and costs too much to assess the character of each loan applicant, while someone’s credit history is cheaper to obtain and may be a better indicator of the statistical likelihood of repayment.

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The Truth in Loans

This shift to automated credit decision-making is particularly true for small loans. For loans over $250,000, many banks are willing to expand underwriting criteria and spend time to meet applicants and understand their businesses. For smaller loans, the decision-making process is much like applying for a credit card: impersonal and automated. In fact, most large banks today are organized such that the managerial oversight for business loans under $250,000 is part of the consumer-lending function rather than the commercial lending function. Since small loans are managed by the consumer-lending function at most banks, your personal credit history is the single most important criteria in determining the likelihood of you obtaining bank financing for your business.

Remember: Your business isn’t the borrower but you are and if you’re borrowing less than $250,000 and your company doesn’t have a long, audited history of profitability, your bank will require you to personally guarantee the business loan. A personal guarantee is a scary thing to sign. I know this firsthand because I’ve signed a few of these personal guarantee documents and they always make me shudder a bit. It’s ironic that you can spend thousands of dollars in legal fees to incorporate your business in order to limit your personal liability, but it’s virtually impossible to get bank financing without risking your personal credit. In my view, there are some promising trends that will help entrepreneurs get bank financing without risking their personal credit: first, some data companies are establishing business credit ratings that are distinct from personal credit ratings. Second, some banks are specializing in small-business lending and recognizing the value to the entrepreneur of protecting his or her personal credit rating; and lastly, some companies are helping startups to establish and improve their business credit rating. In the meantime, understanding that landing a startup loan is much like obtaining a credit card will help establish your expectations and, hopefully, simplify the process.

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How to Approach a Loan

Understanding the process as a whole can not only make borrowing easier but can also give you an edge when negotiating with your lender. When there is a large loan hanging in the balance, even a slight edge can save you thousands in the long run. Here’s what you should know to keep your lenders happy and to keep the table tilted in your favor.

Call Early and Often – like most things in business, negotiating a loan starts with building a strong personal relationship. Start by inviting a banker to your place of business. Impress them with product samples and even take them to lunch if chances permit. A little kindness goes a long way.

Get a Book – every banker will tell you business loans are often predicated on meeting and maintaining some well-established operating parameters. Take a glance at the banker’s bible for these crucial business metrics such as the Robert Morris Associates’ Annual Statement Studies (The Risk Management Association) or RMA. This guide to over 600 industries includes common financial ratios and statements culled from a national survey of commercial loan accounts. Get a glimpse into the mind of a banker by picking up a copy of the RMA at a bookstore, library or bank. RMA benchmark ratios can become targets to qualify for, or maintain, commercial credit.

Offer More – if you want to get a loan out of a banker, the best enticement is a hefty portfolio of other banking needs. What most banks want are depository accounts and fee-generating services. If you can’t offer more than a monthly loan payment, be prepared for a polite “No, thank you.” The reason is, the margin between what banks pay for money and what they charge for it has been shrinking. Margins are so narrow that loans are only mildly interesting to most bankers.

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Forms of Loan Programs

Secured and unsecured loans:

Loans can be secured or unsecured. An unsecured loan has no collateral pledged as a secondary payment source should you default on the loan. The lender provides you with an unsecured loan because it considers you a low risk. A secured loan requires some kind of collateral but generally has a lower interest rate than an unsecured loan. The collateral is usually related to the purpose of the loan. For instance, if you are borrowing to buy a printing press, the press itself will likely serve as collateral. Loans secured with receivables are often used to finance growth, with the banker lending up to 75 percent of the amount due. Inventory used to secure a loan is usually valued at up to 50 percent of its sale price. Although the SBA doesn’t actually loan money itself, it does provide loan guarantees to entrepreneurs, promising the bank to pay back a certain percentage of your loan if you’re unable to. Banks participate in the SBA program as regular, certified or preferred lenders. The most basic eligibility requirement for SBA loans is the ability to repay the loan from cash flow, but the SBA also looks at personal credit history, industry experience or other evidence of management ability, collateral and owner’s equity contributions. If you own 20 percent or more equity in the business, the SBA asks that you personally guarantee the loan. After all, you can’t ask the government to back you if you’re not willing to back yourself.

The Loan Guaranty Program. This is the primary SBA loan program. The SBA guarantees up to $750,000 or 75 percent of the total loan amount, whichever is less. For loans of less than $100,000, the guarantee usually tops out at 80 percent of the total loan. A Loan Guaranty Program loan can be used for many business purposes, including real estate, expansion, equipment, working capital or inventory. The money can be paid back over as many as 25 years for real estate and 10 years for working capital. Interest rates are a maximum of 2.75 percent if over seven years.

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Types of Loan

General Definition:

Money borrowed that is usually repaid with interest

Types of Loan:

The most common type of loans come from banks, which exist to lend money, so it’s no surprise that banks offer a wide variety of ways to fund a business’s growth. Here’s a look at how lenders generally structure loans, with some common variations:

Line-of-credit loans – the most useful type of loan for a small business is the line-of-credit loan. This is a short-term loan that extends the cash available in your business’s checking account to the upper limit of the loan contract. You pay interest on the actual amount advanced from the time it is advanced until it is paid back. Line-of-credit loans are intended for purchases of inventory and payment of operating costs for working capital and business cycle needs. They are not intended for purchases of equipment or real estate.

Installment loans – these bank loans are paid back with equal monthly payments covering both principal and interest. Installment loans may be written to meet all types of business needs. You receive the full amount when the contract is signed, and interest is calculated from that date to the final day of the loan. If you repay an installment loan before its final date, there will be no penalty and an appropriate adjustment of interest.

Balloon loans – these loans require only the interest to be paid off during the life of the loan, with a final balloon payment of the principal due on the last day. Balloon loans are often used in situations when a business has to wait until a specific date before receiving payment from a client for its product or services.

Interim loans – interim financing is often used by contractors building new facilities. When the building is finished, a mortgage on the property will be used to pay off the interim loan.

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Business Loan vs. Business Line of Credit

1.Business loans are used one time whereas lines of credit can be used multiple times.

2. When you get a loan is different from when you get a line of credit. A loan is normally not something you would get until you need it because it’s normally for one specific purpose. A line of credit is something you obtain before you need it. Remember the line of credit, unlike a loan, is not for one specific purpose.

3. With a loan you have a monthly payment that, although there are a few exceptions, doesn’t change from month to month and those monthly payments begin right away. Whether you’re using all the money or not your monthly payment does not change. With a line of credit you only make payments on the amount of money you’ve borrowed so if your balance is zero your payment is zero.

4. The closing costs are higher for a loan than a line of credit. There are always exceptions to every rule but most loans carry closing costs anywhere from 2-7% whereas lines of credit have very minimal or no closing costs. Cost is an obvious factor in determining loan vs line of credit.

5. Loans carry with them fixed terms or amortization periods. Because of this the monthly payments on loans are usually higher than the monthly payments on lines of credit. Think about it like this. If you were to get a loan for $50,000 your monthly payment will likely be $400-700/month more than it would be if you owed $50,000 on a line or lines of credit.

6. Loans are usually best for long-term debt that gets paid off over 2 to 6 years. Lines of credit, however, are best for short-term purposes such as financing receivables, marketing, and making payroll. We acknowledge that lines of credit are great for unexpected cash-flow issues but make sure you don’t exhaust your lines of credit on surprises. Use as much of your line of credit for what we call RGA – Revenue Generating Activities.

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Small Business Administration Programs

The SBA LowDoc Program

This is a special loan promising quick processing for amounts less than $150,000. “LowDoc” stands for “low documentation,” and approval relies heavily on your personal credit rating and your business’s cash flow. LowDoc loan proceeds can be used for many purposes. Applicants seeking less than $50,000 are required to complete only a one-page SBA form. Those seeking $50,001 to $150,000 submit the same short form, plus supply copies of individual income tax returns for the previous three years and financial statements from all guarantors and co-owners. The SBA guarantees a 36-hour turnaround on these loan requests.

The SBA Express Program

This is a close cousin of the LowDoc, also offering loans of up to $150,000. However, SBA Express gets you an answer more quickly because approved SBA Express lenders can use their own documentation and procedures to attach an SBA guarantee to an approved loan without having to wait for SBA approval. The SBA guarantees up to 50 percent of SBA Express loans.

CAPLine loans

These provide working capital through a selection of revolving and nonrevolving lines of credit. CAPLine loans are guaranteed by the SBA up to $750,000 or 75 percent of the total loan amount, whichever is less. The CAPLine program includes variations for seasonal businesses, companies that need credit to complete a large contract, and builders and small companies that can’t meet requirements for other financing.

The SBA’s Minority and Women’s Pre-Qualification Loan programs

These help women and minority entrepreneurs pre-qualify for loans of up to $250,000. Private intermediary organizations chosen by the SBA help eligible entrepreneurs complete a loan application. With the SBA’s guarantee attached, the bank is more likely to approve the loan.

The Microloan program

This program helps entrepreneurs get very small loans, from less than $100 to as much as $25,000. The loans can be used for machinery and equipment, furniture and fixtures, inventory, supplies and working capital, but not to pay existing debts. Microloans are administered through nonprofit intermediaries using SBA funds. Terms are usually short, and application turnaround time is less than a week.

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Strategies in Handling a Loan

1. Anticipate Failure

It may seem counterintuitive, but a great way to gain a banker’s trust is by discussing how your business could fail. Write down 10 things that will challenge your business-and the ways you’ll overcome those challenges. This list of potential pitfalls not only shows that you have thought through your business, but also gives your banker great ammunition for the tough questions his loan review committee will ask. Be sure to include the old standby which is the key-person risk. If you die tomorrow, how would you repay the bank’s money? Key-person risk is present in every business and can best be addressed only by substantial life insurance. Almost every borrower was required to have life insurance policies that would pay twice the amount of the loan. It’s morbid and at the same time expensive. But it shows you are thinking through all possibilities and helping the bank reduce its exposure to risk.

2. Plan Pessimistically

When a loan was closed, a borrower’s negotiations were just beginning. Spending the money was more arduous than getting it.

Mostly, the SBA loan is granted based on the projected expenses and revenue in a borrower’s business plan. When they began using the money, however, the bank expected expenditures to fit the original budgets. In many cases, as soon as the ink dried on the business plan, the borrower had to make adjustments. Each variance meant showing the bank why the costs were necessary. A thorough business plan with clear projections is vital to getting a loan approved. But projections that are too optimistic will get you in trouble. The glass always looks half full when you are going into these things based upon the claims of most borrowers.

3. Negotiate Smartly

Most borrowers say that careful planning and good relationships earned them rates and terms that saved them thousands in the long run. Start negotiations with what’s most important to you. Others may say, that was some protection from risk and they made it clear that home and retirement savings were off-limits as collateral. The bank agreed-and crafted special terms that protected them in a worst-case scenario.

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