Is it time to realize your dream of being an entrepreneur? All over the country in towns just like yours, small businesses such as breweries, senior care centers, and pet grooming stations are popping up as fast as their owners can get space and funding. In fact, in 2015, approximately 24 percent of entrepreneurs were looking to start a business, according to a Bank of America report. And if you already own a business, you may be looking to grow and expand – another activity that requires capital.
Whether you’re running a business or ready to start one, securing funding doesn’t need to be a hurdle. There are several small business financing options that exist to meet your needs, and small business loans are among the most popular solutions. Small Business Administration (SBA) loans, in particular, are attractive to business owners thanks to lower interest rates and affordable monthly payments. But as with any loan, there are steps you can take that will help you secure even lower rates and keep your monthly payments within your budget.
1) Pre-Qualifying for an SBA Loan
The first step to ensuring your SBA experience is a positive one is to make yourself as attractive as a borrower as possible. Banks assess both you and your business by what we refer to as the 5 C’s: capital, credit, character, capacity and collateral. Meeting at least the minimum qualifications in these areas can help put you on the fast track for loan approval. Here’s a high level overview of what banks are looking for in each category:
Capital is the amount of cash you invest in the business, also known as the down payment on the loan. Investing liquid capital is always a requirement because banks won’t fund 100 percent of your total project cost, and making a significant down payment is a good way to show banks you’re invested. The requirement for the down payment amount varies based on your business, but if you’re hoping to fund a new business, they like to see at least 30 percent cash down. Acquiring an existing business or franchise requires about 20 percent down.
Most banks look at your personal and business FICO credit scores. They require a personal credit score of at least 680 and small business credit score of 160. Do your research before applying for a loan to see you need to improve your score. As a part of your research, be sure to do a “soft” pull of your credit history, which will not impact your credit score.
Also known as cash flow, capacity measures your ability to generate an income that can be used to pay back the borrowed debt as well as cover your personal debt obligations. Current income and your spouse’s income both play a role in the bank’s assessment, but anticipated income from a startup business typically isn’t taken into consideration. Keep this in mind when deciding whether to leave your current job.
Your experience in business as well as the industry of the business you’re hoping to fund both play a large role in gaining the confidence of potential lenders. Although having a strong personal character won’t help you qualify for an SBA loan, some events such as criminal charges or missed child support payments can make obtaining a loan more difficult.
The SBA usually requires some form of collateral to secure a loan, such as a home, property, boat, etc. You typically won’t be denied a loan based on insufficient collateral if all other requirements are met, but they will require collateral if you possess “worthwhile assets.” Not to mention, having more proof of collateral could potentially help you get better loan terms because you��re personally guaranteeing the loan.
2) Determine Your Budget
A crucial component of obtaining the best loan terms for you and your business is determining your budget. Using an SBA loan, or any kind of debt financing, to fund your business, means you will have loan payments to make, sometimes before your new business’s doors are even open. As part of your cash flow management, you need to be sure you have enough cash on hand to make payments on time.
SBA loan rates currently range from 5.5 percent to 8.25 percent and have a 7 to 10-year repayment period. Smaller loans will, of course, mean smaller monthly payments to make. But, if you need a large loan to cover the cost of your project, you may be able to get more favorable terms. Banks make money on the interest that you, the borrower, pay over the lifetime of your loan. So, if you’ve met the criteria of all 5 C’s and are also applying for a large loan, it’s more likely that banks will be competitive to win your business as a worthy borrower. This definitely doesn’t mean you should apply for a larger loan than you need, but’s it’s an advantage to take into consideration if you need more start-up cash.
Increase Your Project Budget by Combining Financing Methods
If you have your hopes set on a large-scale project, but aren’t sure where to obtain the cash for the initial down payment, you may want to consider combining equity and debt financing methods. Almost half of all Guidant clients who apply for an SBA loan get their initial cash injection through the Rollover for Business Start-up (ROBS) arrangement. ROBS allows you to use your qualified retirement funds to finance a small business or franchise without paying any early distribution penalties. Using the ROBS process, you can roll your retirement funds into the bank account of your new corporation and then use the funds as the down payment for an SBA loan.
Financing your business with an SBA loan is a great way to fund your business with low interest rates and attractive repayment terms. No matter what financing method you decide is best for you, be sure to take the necessary steps to become an attractive borrower, find a loan that meets your business’s needs, and get the best terms possible.