How To Get A Small Business Loan

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Need a loan for your small business? Here is an overview of the main options available to you.

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How To Get A Small Business Loan

  1. 1. How to Get a Small Business Loan
  2. 2. lending to small businesses and are doing less and less of it. Banks don’t like
  3. 3. Getting a small business loan is becomingharder and harder.
  4. 4. In 2009, there was $326 billion in non- real estate related small business loans.
  5. 5. In 2012, there was only $280 billion in such loans outstanding, according to a Small Business Administration (SBA) report.
  6. 6. To be categorized as a small business loan, the amount of the loan simply needs to be less than regardless of the size of the business. $1 million dollars,
  7. 7. When the amount of the loan is dropped to $250,000 or less, there is only $167 billion in small business loans outstanding. This is less than 8% of the total amount of business lending made by banks.
  8. 8. What are your options? There are four main sources for loans: •Community Development Financial Institutions (CDFIs) •Crowdfunding platforms •SBA loans •Commercial loans. Each of these sources have different eligibility requirements, interest rates, and loan sizes, which make them best suited to certain types of businesses.
  9. 9. CDFI Crowdfunding SBA Loans Commercial Loans Eligible with less than 2 years in business Yes No No No Loan Sizes Many in the $20k range, $124k average overall $1,000 - $10,000 Up to $5 million Depends on collateral Interest Rates 6-8% 0% 7.5-9.75% Depends on type of loan, probably lower than SBA loans.
  10. 10. Community Development Financial Institutions
  11. 11. CDFI is a non-profit financial institution funded in part by the Small Business Administration (SBA) Most CDFI loans are for less than $100,000 and many are in the $20,000 range. Interest rates are generally around 6-8%.
  12. 12. A CDFI will require: •Fill out a loan application. •Provide a business plan. •Sign a personal guarantee. •In many cases, put up personal collateral (just like a bank to get a loan). While a CDFI will only make loans to businesses that they have a high degree of confidence will be repaid, they have more flexibility to approve loans and will often work with the applicant to get their loan approved.
  13. 13. Don’t expect the application process to be a cakewalk. Be prepared to provide supporting facts for the assumptions in your business. Like how much you can charge for your product/ service and the potential size of the market for your business.
  14. 14. the process of getting the small business loan from a CDFI can be rigorous and require you to put up your home as collateral. Overall, Here is a list of community development financial institutions. You should first look towards a locally based CDFI, as many are limited to helping businesses within a certain geography.
  15. 15. Sources: •ncif.org •businessweek.com
  16. 16. Crowdfunding
  17. 17. If you only need to borrow: $1,000 to $10,000, You may want to consider crowdfunding your loan on a platform such as Kiva Zip. Crowdfunding means that instead of having a bank lend you the money, your loan will be funded by many different individuals, who each lend a small fraction of the total loan amount. As you repay the loan, these lenders are reimbursed.
  18. 18. Kiva Zip loans offer two main advantages: They have very lax eligibility requirements1) 2) They carry 0% interest Anyone can apply for a Kiva Zip loan as long as they are 18 years old, have a monthly debt payments-to-income ratio less than 35% (and no overdue debt), and have an annual income of less than $200,000.
  19. 19. In order to apply for a Kiva Zip loan, you must first find a“Trustee” Who is an individual or organization that you know personally and is willing to publicly endorse you for a loan.
  20. 20. Trustees are not guarantors and are not financially liable for your loan in any way. Once you have a Trustee, you fill out a simple application form and write a personal story, a business description, and the purpose of the loan. To view examples of Kiva Zip borrowers, click here.
  21. 21. Loans
  22. 22. SBA loans are loans made by banks that are backed by the Small Business Administration. They are designed for people who may not have enough collateral for a conventional bank loan, but the other eligibility requirements are generally very similar.
  23. 23. One of the major limitations of SBA loans is that they cannot be used to start a new business.
  24. 24. There are two main types of SBA loans 7a loans CDC 504 loans can be used for general business purposes. are used to purchase real estate and generally provide a public benefit, such as the creation of jobs.
  25. 25. You will have to follow these four steps to apply for an SBA loan: In general, 1. Determine your eligibility 2. Find an SBA-backed bank 3. Assemble your paperwork 4. Fill our your SBA forms For an in-depth look each of these steps, click here.
  26. 26. For more information, read our series of SBA articles: • SBA Loans – The Ultimate Guide • Patriot Express And Other Special SBA Loans – The Ultimate Guide • Live Oak Bank: Straight Answers On SBA Loans • SBA Loan Interest Rates – Current Rates and How They Work • SBA Form 1919 – How To Fill Out And Where To Download • SBA Form 4 – How To Fill It Out And Where To Download • SBA Form 413 – What It Is And How To Fill It Out
  27. 27. Commercial Loans
  28. 28. loans to get, but they may also carry better terms than SBA loans. These are by far the most difficult
  29. 29. In general, you will only qualify for a commercial loan if you have been in business for at least 2 years And can convince the lender that your business can generate enough monthly cash flow to make loan payments.
  30. 30. Debt Service Coverage Ratio(DSCR) To approve your loan, most banks will want see that you have a debt service coverage ratio of 1.25 or higher.
  31. 31. Definition of Debt Service Coverage Ratio: Total Net Cash Income (your annual profits after subtracting non-cash additions to income, before income taxes) Divided By Your Debt Service (the amount of the money you will need to pay in interest and principal over the year).
  32. 32. To figure out the size of the loan that your business might qualify for, you can use a mortgage calculator to figure out the payments. You should keep in mind that business loans are generally for much shorter periods of time than home loans. Typically, a business loan will be for 3 to 10 years.
  33. 33. your business does not have enough positive net income to take the loan size you want? What if
  34. 34. comes into play. your business plan This is where You must be able to convince a banker that the loan will put you in a position to generate more cash flow and income. The bankers look closely at your business history to see if the numbers support this assertion.
  35. 35. but they also want to make sure they can collect in the First and foremost banks want to make sure the business has enough cash Flow, “worst case” scenario.
  36. 36. Other Factors That Go Into Getting A Small Business Loan Approved: • The background of the owners (including credit history). • The experience of the executives. • The amount of investment that the owners have put into the business. • The amount of personal collateral that the owners are willing to pledge to secure the loan.
  37. 37. There are a lot of different types of commercial loans, including: • Term loans • Short-term loans • Operating line/lines-of- credit loans • Revolving lines of credit • Mortgages • Business acquisition loans • Debt financing • Franchise startup loans • Microloans • Professional loans • Secured/Unsecured working capital loans • Startup loans • Factoring For a more comprehensive explanation of commercial loans, see article: Commercial Loans – The Ultimate Guide For Small Business Owners.
  38. 38. You may also be interested in these fitsmallbusiness.com articles: • Working Capital: How To Raise Money For an Existing Business. • Small Business Loans For Women – How And Where To Get One. • Accion: Where To Borrow $10,000 For Your Business. • Small Business Loans: Are You Paying Too Much? For a more comprehensive explanation of commercial loans, see article: Commercial Loans – The Ultimate Guide For Small Business Owners.
  39. 39. Click here to tweet this presentation. Join The Community: www.FitSmallBusiness.com See the full article here

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