Small Business Loan Help: Finding the Resources You Need
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There is a dizzying number of loan options available to small businesses. We’re talking dozens of types with differing repayment structures, costs and required collateral. How can you know you’re making the best choice? Act carefully while learning about the process and the products you’re considering.
Finding help in your hometown
If you don’t know where to begin, you have plenty of local resources to tap. Make the first stop a local business center:
- SBA — the U.S. Small Business Administration has district offices offering counseling and training, as well as guaranteed loans for creditworthy veterans and special loan programs for businesses dealing in international trade.
- SCORE — The business mentoring program of the SBA, the SCORE Association pairs business owners with hundreds of trained counselors around the country, via email and in person, while also offering online courses, webinars and in-person workshops. A recent live webinar that was offered was “Where’s the Money? 10 Small Business Loan Types and How to Qualify.”
- SBDC — As another offering of the SBA, individual states have their own Small Business Development Centers (locations can be found here), with a lot to offer those seeking business loans. For example, the New Jersey SBDC offers entrepreneurs free counseling and training, plus workshops, including the four-hour “Accessing Capital to Grow Your Business” workshop.
- Chambers of commerce — Local chambers of commerce (find yours here) are often thought of as a resource for business networking, but some also connect local businesses with business loan information, such as this comprehensive rundown of the options available in the Mobile, Ala. area.
The Queens Economic Development Corporation (QEDC) is one such local organization offering loan assistance to new small business owners. Among the more than 400 entrepreneurs it serves each year, business loans are a very common concern. Andrea Ormeno, the director of QEDC’s Women’s Business Center, clarified that it is not a direct lender — rather, it assesses the needs of entrepreneurs who come to the center. It also periodically holds lender workshops to go over the individual requirements of lenders.
“[Often,] they don’t know how much they need, [so] we help them to figure it out with projections and estimates,” Ormeno said. “[Those can include] how much the rent is, or how much is needed to purchase equipment. So when they go to lenders, they are better prepared.”
Ormeno’s organization also runs a competition for small business owners with a $10,000 prize. When contestants develop their business plan to enter the competition, they can still use that plan when applying with a lender, even if they don’t win the competition, she said.
Finding help online
While at one time there were only traditional banks to look to for small business loans, there now exists a large selection of online lenders. That’s a good thing, because a traditional bank loan was already difficult for a small business to get approved for, and it has proven especially hard since the 2008 financial crisis. Small business loans are down 41%.
Some of the choices in online business loan lenders indicate the array of borrower profiles the market serves:
- OnDeck Capital touts its responsible business loans to small businesses, as well as its transparency and customer experience.
- Currency can help with large purchases, such as heavy equipment, for up to $2 million.
- Credibility Capital has offered short-term business loans since 2013 to low-risk borrowers.
- Kabbage is an option for new small business applicants with bad personal credit.
There also are several online choices that follow the crowdfunding model, which Ormeno said “is more accessible right now [for applicants] if they don’t have good credit scores … it’s more about your story and how compelling it is.”
An example recommended by QEDC to entrepreneurs is Kiva, a nonprofit that allows small businesspeople to appeal to their networks for loans of as little as $25. Unlike with the usual crowdfunding model, these loans are not donations. The borrower still must repay them, but direct loans are repaid at a 0% rate.
How to find the right loan for your business
Banks will have the best deals for a line of credit or a bank term loan. However, as noted above, it’s the rare business these days that gets approved, but chances are a bit better with smaller community banks.
If you have a good credit score, an SBA loan is a route worth checking out. The SBA offers Lender Match, a marketplace of loans with terms developed by the lenders with the guidance of the SBA. Appealing aspects include competitive rates and lower down payments, and the fact that collateral is sometimes not needed.
Applying at a traditional bank is going to be a much longer and more formal process than applying with an online lender.
Online lenders also require less paperwork and are more likely than banks to loan smaller amounts. They look at not just financials like cash flow, but social media factors such as online business reviews. The tradeoff is higher interest rates and fees.
Whatever source you go to for a loan, though, the basic process is the same.
- In order to demonstrate your responsibility as a business owner and as a borrower, you will ideally need to have a good personal credit score. If it’s not 650 or higher, you’re going to want to work on improving your score. (More on that below.)
- Assess the amount of money you need, what you need it for and whether you can afford such a loan. This means you need to factor in all expenses like purchasing equipment, rental of the business space and any employee salaries. To calculate if you can afford the payments on the loan, you can use your Debt Service Coverage Ratio (DSCR), a tool that the lenders will use when looking at your application. To calculate your DSCR, divide your monthly cash flow by your potential monthly loan payment. Lenders look for a DSCR higher than 1.
- Gather your documents and apply. The necessary paperwork varies from lender to lender, but most require a business plan, expense sheet, five years of financial projections, a driver’s license, voided business check and bank statements.
If your credit is bad, that’s one of the areas where the local small business organizations listed above may be able to help. “If a person needs help with a credit score, we send them to a financial planner from one of the organizations we work with,” Ormeno said.
Even if you’re not yet applying for a loan, start working immediately to improve your credit score. A major factor determining your rating is the length of your credit history, so keep your oldest account open. Pay your bills on time and don’t carry an ongoing balance. Don’t use too much credit — aim to avoid using more than 30 percent of your available credit. Be sure to also check your credit report at least once a year for errors.
One source of funding Ormeno always advises against is credit cards. “They can charge up to 35% and if you go to a bank and you use your personal credit, it can really hurt you to have to pay right away rather than with a capital loan,” she said.
DIY vs. hiring a loan broker
Maybe your business’s financial situation is straightforward and you are confident in your decision making on loans, or you’ve already gotten plenty of good advice. But if you’d rather have someone else do the shopping around for you, then it’s time to find a business loan broker. Let’s look at some of the pros and cons of each option.
- No extra fees when you do it yourself.
- You are the only one making sure you get a good deal, so you will have to research and compare.
- You will have to spend time shopping around while also filling out applications, so it may be a longer process.
- It’s easier. Brokers can save you the work of researching the marketplace of financing options.
- They may have a better idea of which lenders are likely to work with you.
- They will take care of filling out and submitting the applications for you.
- Brokers are motivated to get the biggest commission, so they may not show you the widest range of options.
- They can be pricey and their total charges may not be immediately clear.
The bottom line
There are a lot of small business loans out there with a lot of different terms and conditions. Doing your due diligence is key to securing the right financing for your business.
Remember, knowledge is power, and there’s no substitute for thorough research. “If you go to a lender and you say, ‘How much can you give me?’ that’s the wrong question,” Ormeno said. “You should be able to know how much you’re entitled to get from the lender.”