Many Avenues Available For Small Business Loans
GRAND RAPIDS — Whether you are starting a new business, looking to add on to an existing one or maybe deciding to start a second venture, knowing what type of funding is available and where to get it is always key.
There are several different options when it comes to securing funds for a business venture. The Small Business Development Center first suggests you start with yourself. Personal assets, savings, retirement funds or the sale of assets may be the best source of financing. Borrowing against the equity in your home or using credit cards also are options.
Family and friends can be a second source of funds; they may loan you money or invest their personal savings or other assets into the business. Suppliers are another source of funding. Some businesses that supply your business with inventory and supplies may be willing to extend credit.
Regulated financial institutions are a fourth and traditional source of capital for business ventures. Banks and credit unions provide a variety of financial services to individuals and small businesses, including lines of credit, term loans and mortgages. Your personal loan will be evaluated on your relationship with the bank, management ability, collateral, owner’s equity, cash flow and credit history.
Carol Lopucki at the Michigan Small Business Development Center advises people to be prepared when they go to the bank to ask for money. She advises people who want to start a business to have a written document, called a loan proposal, which details the following:
- A description of the business, including proposed structure, goods or services you intend to produce, and the expected market.
- Amount of funds requested, including how much you will borrow from friends, relatives, etc., and the amount you will inject without borrowing.
- Reason for the loan. How will it benefit the business?
- Breakdown on the use of loan funds, being as specific as possible, including potential expenses, even adding written estimates from contractors, etc., and a timetable for achieving goals.
- A plan for repayment including the length of repayment and the source of repayment.
For an existing business, include its description and history, including legal structure and age. List products and market, identifying customers and competition.
List the amount of funds requested, just as that of a new business, and a reason for the loan funds — how it will benefit the business.
Include a breakdown of loan funds and repayment plans, just as in new businesses.
Loan proposals also should include management information such as personal resumes for all partners, including education, experience and management capabilities and areas of expertise.
Personal finance statements for owners, partners or stockholders owning 20 percent or more also should be included, and they should have information on net worth, and if self-employed, tax returns for the last three years.
Have a financial statement for the business including, for existing businesses: balance sheets and income statements for the past three years; current figures; accounts receivable and payable; and projections for next year, including cash flow and income statement.
New businesses should include opening balance sheets and projected income statements and cash-flow statements.
The government can be another source of capital. The U.S. Small Business Administration (SBA) provides loan guarantees under its 8(a), 504, 7(a) and Low-Doc Programs. These programs are administered through regulated financial institutions or community development corporations (CDCs).
The 504 is a fixed-interest loan program specifically designed to help a small company reach its growth potential. All 504 loans are made in conjunction with a bank loan. The bank loan covers half a project’s total cost, while the 504 loan can cover up to another 40 percent of that cost. So a business owner needs only 10 percent equity of the cost to get the project rolling.
Nearly any small business that meets the Small Business Administration’s guidelines can qualify for a 504. The SBA standard is that the company has fewer than 500 workers, net annual income under $2 million and a net worth of less than $6 million. About the only business types that don’t qualify are nonprofits, casinos and banks.
A loan can be made to construct a new building, to buy and renovate an existing building, or to purchase machinery and equipment. The loan periods are 20 years on buildings and 10 years on machinery and equipment.
The 7(a) loan is constructed for businesses with higher financial risk involved. The bank puts up 20 percent of the total loan amount and the SBA guarantees the other 80 percent. “This loan gives banks a tool to provide funding to companies that may be just outside the traditional lending guidelines,” said Nancy Boese of the Michigan Small Business Development Center. “So it allows them to serve a wider breadth of clientele and to give the business money that kelps them start their business or grown their business.”
Under the 7(a) loan, there are numerous subtitles, including the Low-Doc program, which is designed for loans under $150,000.
A Community Development Financial Institution (CDFI) is a financial intermediary that offers a range of financial services and programs to accomplish their primary mission of community development.
Investors or angels also may contribute to a business’s capital in return for partial ownership or debt repayment. Financing can take many forms, from a simple partnership or debt financing to a private stock offering.
A BIDCO is a non-bank financial institution that provides assistance with financing as well as strategic consulting to small and medium-sized companies. The last option the SBDC suggests when searching for capital for a business is a venture capital fund. Venture capitalists provide equity investments to businesses experiencing rapid growth. In addition to firm ownership, venture capitalists also will want management input in the form of board seats or executive positions.
Boese said one of the biggest mistakes or misconceptions when obtaining a SBA loan is the matter of collateral. “Most people don’t understand that you still need collateral,” she said. “Some people don’t want to put up their house or life savings, but it is not the bank’s responsibility to believe in this business, it is the business owner’s (responsibility) and they have to reach a comfort level where they are willing to stand behind their business and take a risk.”
In addition to the sources suggested by the SBA there are numerous other sources of money available for different groups of people who meet certain specifications. “Bank One has a pile of money set aside for Hispanic business owners. Huntington Bank will give a lender a $100,000 business loan based on a good personal credit report with the bank. National City offers loans to people who are willing to locate in the Heartside district,” Boese explained. “There is a lot of money out there, you just have to be resourceful and ask the right questions. Never try one bank when looking for a loan, try three or five. Try every avenue.”
The Michigan Small Business Development Center can assist any new business owner or small business owner in finding resources to meet its needs. Contact the office at 336-7370 or check its Web site, www.mi-sbdc.org