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What is the best small business loan to go after?
I am in the process of researching and applying to small business loans and I'm wondering if there is a certain type that is easier to secure than others. I've applied for SBA loans with no luck and am now looking at different loans through local and national banks. I am starting a second company and need about $15-20K to help secure an office and purchase supplies. Any suggestion of where else to find service-oriented business loans?
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7 Answers
Hi Jamie,
This is one of the questions that I am most often asked by clients. Please see my response below;
A lot depends on the type of business and the situation however the first step is to ensure that you have a good proposition for any prospective financier. Just a few weeks ago I was speaking to a commercial lending manager for a large bank. During our discussions he mentioned that despite the current economic climate, they are approving around 80% of good applications currently.
OK… So what is a “good” application..?
1) You absolutely need to have a business plan. Without one of these you pretty much have no chance and as first impressions count, I wouldn’t suggest trying your hand without a business plan expecting that you’ll get a second shot by producing one and making another appointment!
2) You need to be able to demonstrate a knowledge of the business (or proposed business), your target market and the industry that you will be operating in.
3) The cash…. How much you need, why, how long will you need it for and what you’ll be spending it on. It is important to state quite clearly how much you actually need. For example if you ask for 100k when you actually need 150k but expect that the bank won’t go that high – the chances are that a savvy commercial lending manager will see through this, you’ll look as if you don’t have a true understanding of the finance requirements of your own business – and the answer won’t be the one you’re wanting to hear!
If you’re wanting the cash for use as working capital – ask yourself “Do I need all the money in one lump sum”? If the answer is no then you can negotiate with the lender to release it in stages provided that you meet certain pre-defined milestones. This can be a more compelling business case for the lender as their risk is reduced in this instance.
In addition;
Do you have anything that you can offer as security? This reduces the risk and makes the proposition appear more appealing.
Are you contributing any of your own funds to the venture? If so – again, this makes the proposition appear more appealing because it demonstrates your own belief in your venture in that you are prepared to put your own assets on the line.
Venture Capital – Have you approached any of these organisations? With VC’s they will want to acquire some equity in the venture in return for their cash (and may want to place someone on the board) however on the upside often they come with significant experience and contacts which can help to propel your business forward. They generally are less risk averse than the banks however their costs are higher. VC’s tend to want to keep the investment in the business for a relatively short time before harvest so will want to have a clear exit strategy agreed at the outset.
Another option is Business Angels. They are similar to VC’s however tend to want to assist new business ventures for more philanthropic reasons.
Finally I’d suggest locating one of the government run business support agencies in your area. They are likely to have the latest information regarding grants and other funding that may be available and may aso be able to assist with developing a business plan and marketing strategy if you do not already have these in place.
I wish you the very best of luck!
Andy.
Jamie,
I agree, in the grand scheme of things, a $15 - $20K loan is a small hurdle. I tell borrowers who come to me, it can usually be done as a "signature loan" at a local bank. A signature loan has the same criteria as getting a credit card - you need a decent/good personal credit score. The bank puts the loan in the name of the business, but ultimately you are responsible for repayment.
As Todd and Andy have pointed out, have a "loan package" all together when you visit the bank. Ask for the commercial lending representative. As Andy has pointed out, your package should include - 1. What are you doing? 2. Who are you and the members of your team and what makes anyone think you can do it? 3. How much money are you looking for? 4. How will it be used? and lastly 5. What is your plan to repay the loan? If you can answer these question in a concise fashion, you will benefit from the exercise.
Working capital is the lifeblood of any business. An undercapitalized company is like driving a car with fumes in the gas tank, you won't get far. Better to ask for more money with a good plan than too little and no plan. I agree with Todd in that you should cut back on your expenses from the start to conserve whatever capital you can raise. At this stage you will only be able to raise "seed capital" from your friends and family. This money should go toward furthering the viability of the business - Not paying salaries etc.
And finally, Eric mentioned accounts receivable financing. My firm has been providing invoice factoring nationwide for over a decade so if you would like to learn more about it, please feel free to reach out and contact me directly. I'd be happy to help you.
Being an entrepreneur is a vocation, success is the reward,
Gary
Don't rule out going to a Community Development Financial Institution. Called CDFIs there are about 1,000 in the U.S. some are for profit, some are non-profit. All work under rules of the U.S. Treasury. They have been the shining star in the lending world during the last three years. Many of them have small loan sizes, but some can make loans of $500,000 or more. A $25 to $50k loan is right in many CDFI lender's ranges.
Sounds like you may not need to even apply for a small business loan! Do you have any existing assets, specifically accounts receivable? If so, use your existing assets as collateral to secure the funding you are seeking rather than adding new lines credit against your business. There are countless alternative lenders who provide accounts receivable financing that are often easier to obtain and may be less costly. I actually work with numerous businesses using A/R financing on a regular routine for operating capital and expansion.
For the amount you are looking for, which is quite small, you might want to consider Family and Friends. Create your business plan, offer to pay interest on loans from these family and friends, with a personal guarantee to pay them back with interest. Consider converting the loan to an investment.
Be prepared to show what you are investing in cash as well, as you need to be at least equally invested and prepared to follow through with your committments.
Funding a startup can be a full time job. Consider ways to cut back on your initial investment. Sublet office space from someone that has extra, buy used furniture from liquidators, or Craigslist. Someones misfortune can be your reward.
If you could cut that amount from $15-20K, to $5-10k, wouldn't your picture look more promising?
Google started in a garage! Is it time to clean out your Garage and start using Coffee Shops and libraries for your meetings with clients?
Usually loans this small may not even worth going to a bank as their collateral requirements don't make sense and it may be better for you to
1. merge your new company with your old one
2. try to put together a business plan and private placement memorandum and increase the amount of money you are looking to raise. Investors actually take you more seriously when you have a larger cushion to work with
send an email to capitalfunds01@gmail.com, they offer a fixed 6% interest loan
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