Traditional banks want to be a part of your business’ growth strategy but a small part. They tend to be conservative in their lending practices. It’s standard, for example, for banks to offer traditional commercial loans only to companies that have been in business for at least two years. Preferred SBA lenders, however, may assist startups at various stages.
SBA Loans: Fundamentals of the Lending Process
Zions Bank (zionsbank.com), for example, does the most Small Business Administration (SBA) loans in Utah for businesses that are starting up. From the information you provide, Zions can tell you within the first week what works, what doesn't and what you’ll need before you even start the application process. For example, startups typically have no income to show so they’re asked to provide a projected income statement for two years: “As a startup, we expect to make X and here’s the reason why….” There are a lot of resources here locally to assist applicants with document preparation. Zions Bank Brigham City Financial Center, for instance, directs their applicants to USU-Brigham City to help in doing financial projections. The government requires an applicant to put in 20 percent of the Ask. If the total request is $100,000, SBA will give $80,000 and you put in $20,000 of your own money. Collateral assets like a house or a car may be used in lieu of cash to secure the loan.
Zions Bank has an SBA department that underwrites the loan. This department makes sure every ‘i’ is dotted, every ‘t’ is crossed on the forms and documentations. Their thoroughness ensures a smoother process when they send the application to the government. It takes the government a month to process the loan. Remember, however, it's not the review time that takes so long as getting everything set to turn in and proving everything you have to prove.
While the government approves the loan, it’s the bank that houses the loan since the government is not a lending entity. Although the loan is under the business, you become the guarantor on it basically saying, “I’ll make sure the business can pay.”
You make payments through Zions Bank one month after approval. Using the above figures, if the relatively small loan amount is $80,000 and its adjusted for seven years with an interest rate based on LIBOR (the standard rate the nation uses for commercial lending), now six percent, then your monthly payment is around one thousand dollars.
Very few businesses are approved for SBA loans. Only three percent of small business owners nationwide used SBA loans as a source of financing within the past year, according to the National Small Business Association’s (NSBA) 2015 Year-End Economic Report. The report explains that more than one-in-four small businesses cannot access adequate financing. Alternative sources, therefore, are crucial to small business lending.
Family & Friends
One funding alternative is to borrow from those you know. NSBA cites that 14 percent of business owners last year reported asking friends and family for loans to cover their costs. Entrepreneurs can structure the borrowed money into a contractual loan administered through a peer-to-peer lending service like Able Lending (ablelending.com); details as follows:
Loan Structure I: Friends-and-Family Lending Model called Able Start. This model also includes other business owners, people involved with your business, etc. Their Start loans are for businesses not yet six months old and below the $50,000 in threshold mark. Able will help set up the profile, handle the loan agreements, and the monthly payments on your behalf. You get to design this loan for exactly the terms and rate that make the most sense for your business.
- Borrow any amount.
- Rates from zero to 18 percent.
- You and lender mutually agree upon the repayment terms.
- Able manages the loan repayment for a fee.
- Their fee for a Start loan is three percent. This is the only fee and there are no others. It's subtracted at the time that they fund the loan.
- No credit check is required.
Loan Structure II: Low-interest term loans called Able Growth. Able underwrites your business and can generally lend up to about 50 percent of your historical revenue. So if you've made $300,000 to date and been operating for a year they can lend you $150,000 with a portion being funded by people you know. Unlike Start loans, Able puts part of the capital into that deal.
- You fund as low as 10 percent coming from people you know on some of their loans. The more people or backers you bring to the table, the lower your overall cost of the loan will be.
- Loan amount ranges from $25,000 to $1,000,000.
- Typically a three-year term with 12 percent interest.
- This is offered to businesses that have made $50,000 the past year, not including grants since this is not considered recurring income.
- They will do a soft credit check on you at the beginning that does not affect your credit. A full credit check is done before they can finalize the loan offer.
- Their fee is five percent and it is capitalized over the life of the loan. This is so that they can fund the full amount to the business rather than subtracting it.
Loan Structure III is a straight up loan refinance. They let the owner or people they know pay about 10 percent of that loan.