Small business owner’s financial questions posed and answered by a small business advocate.
Editor’s note: This is a first in a series of common questions gathered from small business owners and respective answers by a finance expert.
Small business growth and expansion requires capital. How to access it requires his is the first of a series of common questions and answers
Question 1:
I need some working capital for my business expansion. Should I apply for a line of credit or a term loan or both?
If your business is less than 2 years old you are not ready for a line of credit. A line of credit underwriting relies on historical gross revenue and if your business is new, you probably will not qualify for a line of credit from a bank.
You will have to consider a term loan which is determined by three major factors:
#1 Your personal credit and how much outstanding debt do you have. This includes both personal and corporate debt obligations.
#2 Realistic cash flow projections that reflect your ability to pay debt service and grow your business
#3 The lender is familiar with and likes your line of business.
The writer’s caution:
- Many businesses will be approached by on-line lenders offering “quick” access to capital. Beware!
- The cost of these “quick” loans that have a very simple application process, can be dangerous to both the success of your business and your personal credit score. The offering rates may appear to be low since interest is paid daily.
- Daily interest payments do impact the availability of cash to grow your business, and the interest rate, calculated annually, is always double digit. Repaying the debt is difficult and obtaining additional debt at market rates is impossible until the payday loan is paid off.
- If your personal credit is good (680 or higher), many lender both banks and online lenders, will consider a business term loan at a single digit interest rate.
- In many cases the SBA guarantees a major portion of the loan, insuring the lender of repayment. The SBA guarantee reduces the lender’s risk. SBA guaranteed loans are much less expensive than payday loans. And some banks may offer conventional term loans to qualified customers in good standing.
Question 2:
How long does the Loan Application Process Take?
You can find payday lenders online that can provide funding in 24 or 48 hours. Thos loans may be “quick”, but they are expensive. Beware!
There is an online lender United Midwest Savings Bank. UMWSB has a streamlined online process for both start-ups and existing businesses. The biggest hurdle for most borrowers in the credit score requirement. They can provide a pre-approval within 24 hours and then it is up to the client to provide the balance of the information. If the company keeps current financial records and can prepare a realistic cash flow projections, a loan can be closed in less than 10 days. They fund under the SBA 7A program for loans from $20,000 to $150,000.
In the State of Florida Neighborhood Lending Partners makes loans for start- up companies at a slightly higher rate than conventional lenders, but they will consider borrowers with credit scores that would not be acceptable to banks. They will consider loans up to $500,000. The process is slower than online lending, but it is an excellent alternative resource. And, Accion USA also is processing loans for start-up.
All these lenders are underwriting loans with SBA guarantees.
