Category Archives: Finance

Small Business Startup Loans

One of the biggest challenges a new small business must face is obtaining the finances necessary to support their initial growth. In order to proudly turn on your physical or metaphorical “open for business” sign, you’ll need to have access to a significant amount of capital in the form of a small business startup loan.

As one might assume from the title, a business start up loan is a loan meant to help with the financial needs of a new business. Small business start up loan proceeds can go towards things like working capital; the purchase of equipment, machinery, supplies, inventory, and furniture; and the purchase or construction of real estate.

 

Where Do I Get a Small Business Startup Loan?

If you’ve already started your hunt for a loan, you’re well aware that there is a seemingly infinite amount of lenders and financing options out there. Each one will come with their own set of pros and cons, and perhaps you’ve discovered that most of the low-cost options are not available to business owners without a couple years of business under their belts. To help you get started, here is a list of 5 viable options to secure a business startup loan.

Conventional Business Lending

  1. Banks are traditionally known for their lending opportunities, and if you have a good relationship with yours, this may be a perfect place to go. When it comes to bank financing for business startup loans and lending, but banks will not typically offer conventional loans to new businesses. Through your bank you may qualify for:
    • Equipment Financing: Specifically designed to pay for the purchase of equipment and machinery, this loan is similar in structure to a conventional loan. However, the proceeds must only be used to purchase equipment or machinery.
    • Decide Where to Get Your Small Business LoanDetermining where to get a small business loan can depend entirely upon your needs and credit history. For owners looking for small business loans, the following options should be considered:
      • Bank Loans: When it comes to loans, most people immediately think of bank loans. Banks are often your best bet when looking for loans because their access to checking and savings deposits often results in the best rates. However, banks are slow. You may not get your funding for months. With those two factors in mind, if you have a good working relationship with a community bank or credit union, it’s in your best interest to start there.
      • SBA Loans: The Small Business Administration offers government guaranteed loans through various lenders, like community banks or online through smartbiz.com . SBA loan rates rival bank rates but also tend to be document intensive and the approval process make take awhile.
      • Credit Cards: If your business doesn’t crack the high standards of a bank or the SBA, but your financial needs easily fall into your approved credit limits, then a credit card can act as a feasible means for a small business loan.
      • Alternative Loans: Loan alternatives such as peer-to-peer lending, merchant advance loans, or loans from non-profit organizations can get you the money you need. However, be sure to thoroughly read through your term sheet and evaluate the true cost of the loan (APR) before accepting an offer.
      • Personal Sources: Of course, loans from your personal savings or from friends and family can also help you reach your business goals. However, we all know the adage about mixing business and family; for that reason, it’s always advised to tread lightly in this area and only do what you and the lender feel completely comfortable with.

Tips for get a Small Business Loan

You have a vision, a plan, and the motivation to start your own business or take your current one to the next level. Everything is ready to go, all you need is money. For many entrepreneurs, small business loans are the key to fulfilling short and long term goals. So how do you get a small business loan? Is it difficult? Do you need to meet certain requirements? If you’ve asked these same questions, then you’re in luck; that’s exactly what we are going to discuss.

 

Have a Plan

When it comes to securing a small business loan, half of the battle should be fought with strategy. One of the best ways to get all your financial ducks in a row is to devise a solid, well-thought-out business plan. This will show any potential lenders that you’ve done the research and completed your homework.

Here are a few general things you should keep in mind:

  • What kind of business are you starting and what are your long and short term goals?Before requesting a loan, you’ll need to be able to concisely define your business to a potential small business loan lender. What is your product and who does it serve? What is your projected revenue? What tactics and strategies do you plan to employ in order to reach that revenue mark? You should be able to confidently answer those questions before you step foot in a lender’s office.
  • For what do you need a loan?When it comes to requesting a small business loan, you’ll need to have a detailed list outlining what exactly you need the money for. Working capital costs, equipment and operation costs, or long term development costs all constitute good reasons for requesting a small business loan.
  • However, if you’re seeking a loan to pay down surmounting debt, recoup for poor performance, or fulfill payroll obligations, then you may want to consider alternative means of support.
  • How much money do you really need?Next, you’ll need to determine how much you need. Though this number may not be exact, you should be honest and realistic with your estimates. If you overestimate, lenders may shy away; however, if you underestimate, you may find yourself in tight spot far too early.

 

Starting a new business and investing

When you’re starting a new business and investing your time, energy, and often your own hard earned cash into it, the promise of “free” money often sounds enticing. Chances are that you’ve stumbled across at least a few advertisements promoting business grants to help you fund your venture. So what’s the deal with business grants? Are grants available? Are you or your business eligible?

The answer to these questions depends on many variables, so we’ll get to that in a moment. First, let’s start off by defining, in loose terms, what a government business grant is (or in some cases, is not). Federal business grants are funded by tax dollars. Because of that, grant eligibility and approval is a very tightly run ship.

Furthermore, government business grants are appropriated through, well, the government (specifically Congress and the White House). As such, many of these grants are closely aligned to the agendas of a specific government agency like the U.S. Department of Education or the U.S. Department of Agriculture.

If it seems like receiving a business grant, specifically a government-funded one, is tricky. And it can be. Here are some general guidelines and requirements that the federal government uses to determine business grant eligibility:

Only non-commercial organizations (non-profits, educational institutions specializing in medicine, scientific research, education, technology, etc.) are eligible for government business grants.

 

Alternatives to Federal Small Business Grants

If your business doesn’t necessarily fit into the requirements listed above (many do not), there is still hope. State and local programs do exist, as do grant opportunities through other groups and organizations. For example, many large corporations offer grants through an affiliated foundation (i.e. Walmart Foundation Grants), as well as a number of networks that specialize in grants for women.

Additionally, businesses that can attribute to positive gains in local tourism, child care, and energy conservation, and healthy nutrition may also find grants to support their initiatives.

Secured Your Business Credit Card

For many businesses, credit cards are an essential part of your business activities. They can help you build your credit and obtain the assets you need to properly run your business. Unfortunately bad or non-existent credit may make it difficult to be approved for a credit card. For those denied approval for a credit card, if you are looking to establish or rebuild your credit, a secured credit card can represent a viable option.

So, what exactly is a secured business credit card? Quite simply, a secured credit card is one that requires a deposit or collateral up front. In most cases, this deposit must be made in cash, although there are some lenders that will accept collateral in the form of homes, cars, etc.

Though a deposit may not sound ideal, a secured business credit card or secured business credit card can be a valuable tool to build and repair your credit. The security deposit will ensure lenders that, despite your bad credit, you will be able to pay them back. Much like a regular credit card, you can use a secured credit card to make purchases or pay bills when cash is not an option. Your payment history will be reported to the major credit reporting agencies and an account that remains in good standing (no late payments) over a period of time can help you boost your credit score.

 

How Much Money Will I Need for a Security Deposit?

The security deposit required will vary from lender to lender, but all lenders will review your credit history, income or available capital, and perceived ability to pay on time. For those who have bad credit, that may sound scary, but keep in mind that this particular type of card is specifically for individuals or businesses with bad credit.

Typically, your credit limit will be equal to or a percent more than the required deposit; this means that the credit card company is lowering their overall risk by securing funds ahead of time. For example, if you’re approved for a $500 credit limit, you will be required to pay a security deposit of, or close to, that amount.

It’s important to note that this is not a prepaid credit card in which your deposit will be used against the balance you accrue. Instead, your deposit will be held separately, and you will be required to pay your bill in full without relying on the money you paid up front.

 

What Happens to My Deposit?

As mentioned above, your deposit is held separately, and much like a deposit for say, rental equipment, you will get it back as long as you live up to your end of the bargain. In this case, it’s making regular payments on your account and eventually reaching a zero balance.

When exactly you get your deposit back can also vary from lender to lender, but in all circumstances, your account will need to be in good standing. With that in mind, these are the most common scenarios in which a secured credit card lender will return your deposit.

In one scenario, the deposit can be returned to the cardholder upon their decision to close the account. Of course, it’s not as simple as just saying “I’m done, let’s close this down.” Your account must be in good standing and carry a zero balance at the time of closing.

The other, perhaps most desired, scenario is one in which the account holder has successfully reduced their perceived risk by maintaining a history of on time payments and manageable balances. In this case, the lender may determine to convert your account from a secured credit card account to an unsecured one and to return your deposit without requiring you to close the account.

How to choose the right loans for you

When it comes to loans, small business owners have a lot of options to consider. From selecting a lender to determining the type of loan you need, the path to financing can be a confusing one. Of the many places you may look, the Unite States Small Business Administration (SBA) could be a great resource for information on loans, and specifically, different loan programs that are exclusively available to small businesses.

Of those SBA loan programs, the SBA 504 and the SBA 7(a) programs represent options that, depending on your needs and intended outcome, can present many advantages to you as a borrower. It should be noted that SBA typically does not offer direct loans. Instead, these are guaranteed by the SBA and fulfilled through banks or Certified Development Companies (CDC’s).

 

SBA 7(a) and SBA 504 Loans

While both of these SBA loan types can help small business owners to grow or maintain their business, each differs in the purposes for which it can be used.

To start, let’s look at the SBA 7(a) loan. The SBA 7(a) loan is the SBA’s most popular loan program. If you want to take out a loan so that you can have access to working capital, purchase furniture and fixtures, make leasehold improvements, or acquire an existing business, you should consider applying for a SBA 7(a) loan.

On the other hand, if you need to finance the purchase of land or existing buildings or improvement to lands or existing buildings, purchase ground-up construction commercial real estate, or purchase heavy equipment or machinery to operate your business, you should consider the SBA 504 loan.

Under the umbrella of the 7(a) loan program is the SBAExpress loan. The advantage of the Express loan is turnaround time — completed applications will receive a response within 36 hours, a process which usually takes about one month. Express loans generally follow the same standards and uses as the 7(a) loan program.

Separate Your Personal Business

You’ve been warned about mixing business and pleasure, but what about personal finances and business finances? At times, it may seem tempting to utilize your personal finances to help out when your business needs a boost, but it’s not always the best solution in the long run. Implementing a financial division between your personal and business finances can help you treat your business like the independent entity it is while safeguarding your personal finances.

 

Why is separating your finances so important?

Though there are many benefits to keeping your personal and business finances separate, two of the main reasons you should draw a line in the sands of finance are based on taxes and personal protection.

 

Taxes

Do taxes ever really seem cut and dry?  If you’re in the majority, the answer is no.  If you’re not, then rest assured that many of us are incredibly envious of your taxation acumen.  One of the main reasons you’ll want to split your business finances from your personal finances is taxes.It is much easier to keep track of business expenses if you use a separate business account.

Once you have your shiny new business checking account, keeping track of things like expenses is essential to properly filing taxes.  From office expenditures to operational and inventory purchases, every receipt counts.  When it comes time to file your taxes (or hand everything over to your accountant), a thorough collection of business-only information is going to save you a lot time and a significant amount of stress.

 

Personal Liability

Separating your personal and business finances is important for tax reasons, but perhaps equally, if not more important is a separation of your personal finances for the sake of your personal security. Using your personal finances to back any entrepreneurial venture can be risky business, but not just because of the initial financial gamble.

Entrepreneurs often wind up signing personal guarantees for leases, loans and lines of credit. Sometimes that’s necessary–especially when your business is young and hasn’t established a strong business credit rating. But your goal should eventually be to avoid personal guarantees as much as possible.  The way you do that is by building strong business credit, so lenders can be confident that your business can and will repay its debts

 

Tips for Separating Your Personal & Business Finances

Now that we’ve distinguished two of the more significant reasons to keep your business and personal finances separate, let’s take a look at a few of the ways that you can proactively put this division in place.

  1. Consider incorporating. incorporating your venture as a C Corp, S Corp or limited liability corporation (LLC) can provide tax benefits, but more importantly help protect your personal assets, provided you set it up properly and maintain it correctly.  By maintaining a corporate structure, you can protect your personal assets from business debts, losses and lawsuits. (Keep in mind, though, that if you sign a personal guarantee, creditors can try to collect from your personal assets if you default on a debt.) If you’re serious about creating a business, incorporating is a smart first step.
  2. Open a Business Checking Account. Once you’ve made the decision to start your own business, one of the very first things you should do is head to the bank and open a business checking account. There are multiple reasons why this is a healthy step for a business.  For starters, it will streamline cash flow and making record keeping much more efficient.
    Additionally, a business account lends itself to easy finance tracking – something that you or your accountant will vastly appreciate come tax time. As mentioned before, a separate business account can help signify to the IRS that your venture is a business and not just a side project or hobby, making more of your expenses tax deductible.
  3. Apply for Business Credit Card. Business credit is a big deal, and one quick and easy way to start to build it is by obtaining a business credit card. In addition to fantastic perks like building a credit history for your company, a business credit card will help you eliminate the need for personal credit cards for businesses purposes. Opening one of these cards will also help streamline business finances, and some cards reduce the risk of having your business transactions impact your personal credit. In addition, you may be able to deduct card costs (an annual fee and interest, for example), if you use it exclusively for business purchases. That may not be the case if you mix personal and business expenses on the same card.

What You Need to ABout Bad Credit

Although it may seem like you need to have stellar credit and multiple years in business to secure financing, in today’s lending environment that statement is far from true. In fact, there are over 44 different financing options available to business owners, and not all of them require an A+ personal or business credit grade.

Very poor credit will likely put you out of the running for the lowest cost loans such as bank loans and SBA loans, however you will find that some of those 44 financing options are still wide open to you and your business.

 

Bad Credit Business Loans: The Trade-Off

There is a trade off. Business owners with bad personal credit can often secure financing, but the more risk the lender assumes because of your poor credit scores, the more likely you are to pay a higher annual percentage rate (APR) to cover the extra risk.

This can seem counterintuitive—why would lenders charge more to the business owners who historically have the most trouble paying back debts? Doesn’t it make sense for the lender to charge less so the bad credit borrowers will have a better chance of paying it back?

That may sound better from the borrower’s perspective, but unfortunately it’s the lender’s money, and thus the lender’s ball game. Lenders charge a higher interest rate to individuals with low credit scores to offset a higher expected default rate. (Keep in mind that, although lenders are giving you a capital infusion to help you grow your business, they are trying to grow their business as well, which means maximizing their return on investment.)

Let’s take a look at some of the better options when it comes to business loans for bad credit.

 

Business Loan Options for Bad Credit

Microlenders:

Microlenders are institutions, often operating not for profit, that help low-income or underserved small business owners secure loans.. These loans are “micro” in the sense that they are usually only available in smaller amounts. Up to $35,000 is typical.

There are many microlenders, and each has their own set of rules and requirements. For example, Accion is a microlender that serves small businesses that need assistance with startup costs. A personal credit score of 575 or higher is required, so if you meet their other requirements this can be an option if your scores are lower than average.

The Association for Enterprise Opportunity (AEO) helps business owners find microlenders by state and business focus. Try a quick search and check out the microlenders’ individual websites to find out what their specific credit requirements are.

 

Kiva

Kiva is a microlender that deserves its own callout because of its unique model. It offers entrepreneurs 0% interest loans up to $10,000. The only catch is that entrepreneurs must crowdfund their own loans from the philanthropic individuals who use Kiva’s platform. Kiva has over one million donors and boasts a 94% success rate. To qualify, you must have a business plan and invite friends and contacts for initial funding.

Kiva also reports your payment history to Experian Business. This is great news for the future of your business—if you make on-time payments, you start to build a higher business Intelliscore credit score.

 

BlueVine

BlueVine is an option for B2B businesses who have long invoice cycles and often find themselves waiting to get paid for services or products they’ve already delivered. If this sounds familiar to you, or you experience irregular cash flow and would like to free up some of your cash, BlueVine advances up to 85% of your outstanding invoices up to $100,000. To qualify, you’ll need a 530 personal credit score, and your business must be a U.S.-based business-to-business (B2B) business.

 

Credibly

Credibly offers two different financing options, a small business loan and merchant cash advance product. Their small business loans range from $5k to $250k. Credibly uses their own algorithm to qualify business owners, thus they have no credit score minimum, and you could be approved for a loan within 48 hours of your online application.

To qualify you must be in business a minimum of 6 months with $15k average monthly bank deposits, and stable monthly revenue. Their rates can be high based the risk level they assign to your business, so be sure to calculate the APR of your loan first.

How Many Types of Loans

The SBA, Small Business Administration, provides loans to small businesses through financial institutions such as banks, microlenders, and online lenders. These SBA loans are government guaranteed, meaning lenders will offer them to small businesses at low interest rates because the government has promised to pay back 85% of the loan in the event of default.

 

The three most talked about SBA loan types are:

    1. 7(a) Loans: the most popular loan provided by the SBA, available to new and established businesses with a FICO SBSS Score of 140 or above.

 

    1. 504/CDC(Certified Development Company) Loans: long term financing available for businesses to purchase real estate or high-cost assets they need to run their business.

 

  1. Microloans: small loans up to $50,000 available through non-profit community lenders to new and established businesses.

But wait… there’s more! In fact, there are over 12 different types of funding provided by the SBA.

The following list of additional SBA loans are either for specific types of businesses or for more specific purposes. Some of these loans fall under the umbrella of one of the above loans. It’s worth taking a look to see if you qualify for one or more of these loans.

 

Special Eligibility Loans

 

Community Advantage Loans

Part of the 7(a) loan program, this loan type is for newer businesses in low-to-moderate income areas. Employees of the business must be considered low income or reside in an area that is a low-to-moderate income (LMI) area. Whereas most 7(a) loans require a FICO SBSS score of 160 or above, you’ll only need a 140 or above to qualify for a community advantage loan. Community Advantage lenders offer these loans up to $250,000.

Small businesses experienced

A line of credit, or revolving line of credit, is a flexible loan option for businesses. Businesses are allocated a specified maximum amount of capital available to them through a lender based off certain factors such as current cash flow and business credit rating.

The business then decides when, if, and how they would like to use that capital. Interest will be charged only when you decide to pull money from the line. You will have a specified repayment period, but, like a credit card, there is no penalty for paying early (in fact, it is encouraged).

Although interest is only charged once you use the line, there may be a monthly maintenance fee for letting your line of credit sit unused. Check with your bank or lender to see if that is the case for any line of credit you are considering.

 

What is a secured vs. unsecured line?

A secured line of credit is a line in which the borrower puts up collateral as a security deposit on the line of credit. An unsecured line does not require any collateral assets.

Secured lines are often preferred over unsecured lines by both lenders and borrowers. The lender is taking on less risk, so they will usually grant a higher credit maximum at a lower rate for secured lines. New businesses or businesses with poor business credit might only qualify for a secured line of credit because of the inherently higher risk.

Unsecured lines of credit are more expensive because the lender assumes higher risk. Credit cards are a type of unsecured line of credit. Businesses with many years under their belts and stellar business credit are more likely to qualify for unsecured lines at reasonable rates.

 

What are lines of credit typically used for (and not used for)?

Lines of credit are great for many situations. Here are a few examples:

  • Your business has seasonal fluctuations — perhaps your sales take a dip in the summer. A line of credit will help during the periods of low sales.
  • Your clients take 30 days or longer to pay you for products or services you provide. You might need a line of credit to cover the interim time until you are paid.
  • Your product requires expensive materials — you may need a line of credit to cover the expenses while you build and sell your product.
  • You have the opportunity to receive a discount if you pay a particular bill early — if the resulting discount is significant, you can cover the bill with your line of credit while you wait for cash flow to catch up.

The uses of a business line of credit really can extend far beyond these to touch all businesses. A line of credit, however, is a form of short-term financing, so avoid using your line of credit for long-term expenses.

 

How can I qualify for a business line of credit?

A lender will look at the strength of your cash flow and the strength of your business credit to qualify you for a line of credit. If you don’t yet have a bank account set up for your business, and if you are not yet building business credit, it will be wise to start if you suspect a future need for a line of credit.

An additional factor that a lender will look at is your ability to secure the line. Again, a secured line will be a less expensive option, so if you can put up collateral for the line of credit, a lender will be more likely to approve your application.

Get a Business Credit Card

More and more small businesses are turning to business credit cards as a way of having back up financing and improving their business credit scores at the same time. Many business credit cards offer perks just for using them, including frequent flyer miles and cash rewards. Business credit cards are great for business owners who need back up credit for emergency situations or to offset irregular cash flow. Additionally, making on time or early payments on a business credit card will help your business build its credit so that your business can secure better terms with vendors and suppliers, government and high profile private contracts, and the right business financing at the right price.

But how does one go about getting a business credit card? While the process is relatively painless there are many choices to take into consideration. Let’s take a look at some of the steps you’ll need to take in order to obtain a business credit card.

 

1 Close your eyes, take a deep breath, and look up your credit scores.

The people to whom you’re applying for a business credit card will want to know how responsibility you behaved with your credit. A low credit score will not automatically keep you out of the running for all cards, but if you find yourself getting denied, you can check out this list of business credit cards with lower credit standards.

 

2 Choose the right business credit card.

Spend some time thinking about how you plan to use your card so you can pick one that meets your needs. Do you want rewards? If so, cash back or miles (or something else)? Do you pay in full or plan to carry balances from time to time? If the latter, a low interest rate will be important. You’ll also want to understand whether the cards you are interested in are available based on your credit scores.

Time Saving Tip: Check out Nav’s business credit card marketplace if you need help choosing a business credit card or signup for a free Nav account and get matched to credit card and financing offers based on your credit.

 

3 Apply for your new business credit card!

These applications usually ask for basic business and personal information such as your name and date of birth, the name of your business, its address, and your EIN (or SSN if you don’t have an EIN). If you’re the company owner, you will likely be required to give your personal social security number as well. You’ll also need to provide information regarding the type of business you’ve started—the options being sole proprietorship, partnership, and corporation—along with the number of years you’ve been in business and a little bit about your industry.

If you’re a startup wondering how to get a business credit card, know that business credit card applications are going to require your personal household income information. Usually when you’re filling out your application, you’re asked to enter your business income for the previous year. Since you didn’t have a business income last year, your creditor will have to look to your personal household income when making their decision.

 

4 Sign the business credit card application.

This should be done by of one of the decision-making parties of your company. If you’re the only decision-making party of your company, so much the better. Keep in mind that most of these cards will require a personal guarantee on the part of the applicant. That means if your business does not pay the debt, you will be personally responsible.

A final note: The name “business credit card” is somewhat misleading. It’s more accurate to think of it as a small business credit card, because you can apply for one even if you don’t own an established business. Small businesses take many forms: the successful mom-and-pop bakery down the street qualifies as a small business, but so does the YouTube channel whose owner reviews video games as a hobby and charges a small subscription fee to her viewers. In the case that the YouTuber is a sole proprietor without an EIN, she would use her SSN to apply.