FINANCING OPTIONS TO HELP YOUR BUSINESS GROW Financing Options to Help Your Business Grow A business loan at the right time, and with the right lender, can pull your organization through tough times, and give it the impetus to continue growing. Sources for business loans are abundant and varied. Each lender will have their own set of qualification criteria and approval processes for loan applicants, as well as different types of loans and repayment schedules. Some may require that you have an excellent personal credit history. Others offer loans to business owners with lower credit scores, but require additional collateral or documentation that demonstrates your ability to repay. This guide is designed to help you through the process of finding a lender who can meet your needs. You will also find tips on how to get approved for the amount you need. Types of Business Loans Factoring Factoring is a financing option based on your invoices that are awaiting payment. In the factoring transaction, your business sells, at a discounted rate, its accounts receivable, or invoices, to a third party, called a factor. This sale allows you to receive immediate cash to finance continued business growth. Factors can make funds available when a bank loan is not feasible because the primary focus is on the credit worthiness of your company’s debtors. Factoring can be a good option for under-capitalized businesses that have the profit margins to absorb the factor's fee. Merchant Cash Advance or Business Cash Advance Merchant cash advances, also known as business cash advances are a fast and relatively easy way to obtain needed cash to get your business through a slow period or to cover expenses. If your business qualifies, the process for obtaining a business cash advance is quicker and easier than applying for a traditional business loan. Business cash advances involve selling a percentage of your company's projected credit card transactions based upon your business's credit card transaction history. This is not a loan, but rather an agreement in which your merchant account provider purchases the right to receive a percentage of your future credit card sales based on your company’s credit card sales history. This is a short-term financing option, and can help your business maintain cash flow or pay for equipment or other needs to help your business grow. Line of Equity Some entrepreneurs have successfully financed their startups by obtaining a home equity loan or line of credit. Home equity loans leverage the equity you have in your house. For example, if your home is appraised at $100K and you owe $60K, you have $40K in equity that you can utilize. Most lenders, however, will only loan up to 80 percent of a home’s value, giving you approximately $20K in equity that you could cash out. Home equity loans do not look bad on your credit, and may actually improve your credit rating. Loan for Equipment Purchase Lending institutions often provide companies with loans specifically for the purchase of machinery, tools, office equipment and other types of equipment required to operate a business. Equipment can include items such as industrial washing machines, tractors and backhoes, and office equipment like computers, software, telephones and fax machines. Some banks and other lenders will finance up to 100 percent of the equipment purchase price. Most, however, will lend on a minimum loan-to-value (LTV) basis, which is typically 80 to 90 percent of the purchase price or appraised price. Equipment Lease If your business does not qualify for an equipment loan you may be able to lease the equipment you need. There are three basic types of equipment lease: 1. Finance Lease – This type of lease, also known as a capital lease, could be compared with a rent-to-own agreement. It is a means of financing equipment without actually taking ownership of it. Your business would have all the associated benefits and risks, but you would not actually own the equipment until the end of the lease. 2. Operating Lease –The term of this type of lease is shorter than the actual useful life of the equipment, meaning that your business can acquire and use the equipment for a limited period, after which you would return the asset to the lessor. The residual value of the item goes to the lessor. 3. Sale Lease Back – If you own your business equipment but are in need of working capital one option you might consider is selling your equipment to a leasing company and then lease it back at a fixed monthly payment, so you retain use of your equipment and have cash to grow your business. Commercial Mortgage Loan If you need to acquire land or commercial property for your business, refinance existing business debt, or expand your existing facilities, you might consider applying for a commercial mortgage loan. A commercial mortgage is similar to a residential mortgage, except the collateral is a commercial building or other business real estate rather than residential property. You can apply for a commercial mortgage whether your business is a partnership, a corporation, or an LLC. Most lenders will require a good personal credit rating as well as proof that your business is creditworthy, but some will consider applications with a less than perfect credit history. Expect that most lenders will apply a loan-to-value ratio. You should also be prepared to invest some of your company’s own money toward the purchase. Micro Loans Provided by non-profit lending institutions, and backed by funds from the Small Business Association (SBA), micro-loans are designed to help newer businesses and start-ups. Micro loans are between $5,000 and $35,000, and are typically easier to obtain than other types of business loans. These are community specific loans, so you should look for a lender in your area. Each lender will have their own set of credit requirements, but all will require both collateral and a personal guarantee. You will also need to fulfill business training and planning requirements before your loan is approved. The maximum term for a micro loan is six years. Once the micro loan is granted, the funds may be used for working capital, procuring inventory and supplies, and obtaining necessary equipment, machinery and office furnishings. SBA Loans The SBA also helps businesses that may not qualify for a traditional loan by guaranteeing bank loans to businesses. In most cases, the SBA requires that you have already applied for and been denied a commercial bank loan before applying for an SBA guaranteed loan. The SBA does not place a limit on the amount you can request, and allows up to 25 years to repay most loans. To qualify for an SBA loan, you must be willing to invest some of your own money into your business as well. They will also take into consideration your personal credit history, as well as your business plan, so you should have both in order before applying. Franchise Financing If you plan to buy a franchise, here are a few different funding options you can choose from: • SBA Financing-The SBA loan guarantee program includes financing for franchises, the most popular of which is their 7(a) program. • Specialty Franchise Financing-Non-SBA programs for franchise financing include structured term loans and equipment leases. • The Franchisor-Many of the franchise companies offer their own financing programs, or will help you find a suitable lender from their own list of preferred lenders. • Personal Credit or Assets-Some lenders will require the borrower to pay anywhere from 15 to 30 percent of the total franchise costs. A borrower may choose to refinance a mortgage or cash in their 401k, but it is preferable not to risk personal assets if the funds can be obtained from another source, such as an established business credit account. • ERSOP-This program lets you use your IRA or 401k as start-up investment capital without taxes, penalties, or distributions. SBA 504 Loan Program SBA's 504 program is designed for the purchase of fixed assets such as buildings or land, and is a fixed rate, long-term form of financing. The main purpose of this program is to help further the economic development of a community. The SBA works with Certified Development Companies (CDCs) and lenders from the private sector to help finance small businesses. The CDC, backed by SBA's guarantee, will loan up to 40 percent of the cost of a project, and the private sector lender will cover 50 percent, for a 90 percent loan to value ratio. The loan cannot be used to pay off or consolidate existing debts, nor can it be used for working capital, purchasing inventory or refinancing. Funding from the 504 loan program can be used for: • Buying land or refurbishing existing buildings • Street Improvements or grading • Utilities, parking lots, or landscaping  • Building new facilities • Updating or renovating existing buildings • Buying long-term equipment or machinery The Loan Application and Approval Process Obtaining a business loan involves several steps. If you have not already done so, creating a detailed business plan will be your first step. Then you will need to choose a lender to work with and fill out the required paperwork to submit to the lender. Complete your application package thoroughly, giving careful attention to all the details. A well prepared application will have a greater chance of success. Be sure your application covers the five Cs of business credit: • Capital-Demonstrate that your capital structure will not cause the bank undue risk. • Character-Your personal reputation and business history, as well as your relationship with your lender. • Collateral-The bank will want your loan to be adequately secured with an acceptable form of collateral. • Capacity-Your cash flow, asset/liability structure, and liquidity, and the net worth of both the borrowers and the guarantors. • Conditions-You will need to demonstrate a thorough knowledge of the economy, the industry, and any conditions that will affect your business success. A loan committee will take into consideration these five elements when evaluating your application. Although lenders do not require every loan to be risk-free, they do need to identify possible areas of risks, and determine the level of risk involved. What can you do to ensure your application receives a favorable review? First, communicate your business plan clearly. Have a detailed and complete application, as well as an in-depth plan to repay the loan. Be specific regarding how the funds will be used, and demonstrate that you have a well documented source of repayment. Include an objective analysis of risk factors, and your strategy to deal with problems that could arise. Know in advance what your credit score is, and check with each lender to find out what their credit score requirements are before you apply. This will prevent you from having to apply to more than three lenders, which would be viewed as a red flag to any subsequent lenders to which you apply. Once your loan is approved, you can use the funds for purchases and investments that will help grow your business, such as: • Buying, leasing or renovating a building for your business • Office furniture, fixtures, and equipment • Inventory and working capital Finding the Right Lender If you are new to small business financing, it’s worthwhile to talk to your local SBA District Office. Local office staff can help you understand options from community and national banks. They can also provide guidance about loan eligibility and application requirements. If you are a veteran or a woman-owned business, you can get specialist advice about programs that meet your needs at a local Veterans Business Outreach Center or Women’s Business Center. If you are doing your own research, seek out a bank or credit union that has been through this process before or one that is a Preferred SBA Lender – in other words, a lender who has a proven track record in processing and servicing SBA loans. Choosing the Right Type of Loan The type of loan you select will affect how quickly you receive the money you need. Accounts receivable loans, home equity loans, and secured personal loans are among the quickest ways to obtain cash. For short-term cash needs a personal loan may be your best choice. Because you will be putting up collateral, the lender will be assuming much less risk, which means they will be more likely to approve your application. If you fail to make your payments, the lender will have the recourse of selling your assets to offset their loss. A home equity loan is an option you might consider if you own your home. You can reduce the approval time even more by applying through the company that holds your mortgage. It's important to keep in mind, however, that you could risk losing your home if your business were to fail. An accounts receivable loan is relatively simple to obtain if you have a substantial amount of receivables that can be used as collateral. Accounts receivable loans have higher rates than most other types of business loans, but they can be a helpful source of cash flow when you have no other form of collateral. Loan amount Determine exactly how much cash you will need before you apply, and ask for that amount. Smaller requests have a greater likelihood of approval, but you want to be certain you have enough to pull your business through a tight spot or to create significant growth. Loans for smaller amounts, from $15,000 to $50,000, are less risky for lenders, and therefore more apt to be approved quickly. Planning ahead, researching your needs and your loan options, and being prepared with proper documentation and an outstanding business plan are the surest steps you can take toward getting approved for the funds you need. 9 Mistakes to Avoid When Applying for a Business Loan 1. Not being prepared with a business plan. Even when not applying for a loan, it's wise to have a business plan to help keep your business running smoothly. But a good business plan is a basic essential for the loan application process. Lenders will want to know how you plan to operate your business, and that you are capable of reaching the financial goals you have projected for the business. Include all financial data at your disposal to support your plan. Not shopping around before choosing a lender. Investigate the loan programs offered through credit unions and other sources in addition to your local bank. Small business owners can find excellent resources through the Small Business Administration. 2. Not having the required financial documentation. Whether applying for a business or personal loan, take the time to get your finances in order so you can present the proper documentation to the lender. 3. Not being aware of your credit rating. Obtain your credit history and scores from the three main credit reporting agencies so you have an idea of the type of loan you can qualify for. If your credit report has errors it may be worth the effort to clear them up before proceeding with your loan application. 4. Not indicating what the loan will be used for. Lenders will want details regarding how the money will be used. They also want assurance that you know exactly what your business needs are and how the loan will help meet those needs. 5. Signing the loan agreement without carefully studying the terms. Once you find out you've been approved, it can be tempting to sign without reading the agreement. But take the time to go over the details carefully and ask for clarification of any points you don't understand completely. 6. Not locking in a good rate. When you do find a good rate, don't hesitate to lock it in before it has a chance to go up. Waiting for interest rates to drop further could prove costly. 7. Making changes in your business. Lenders look for stability in business operations, so significant changes in personnel, or in the way you run your business may be cause for concern. 8. Lack of equity in the project. Seeing that you have personally invested in your business project will give lenders more confidence in taking on the risk; you will be more likely to work hard for success when your personal assets are also involved. 9. No collateral to offer. Few lenders will approve a completely unsecured business loan. Glossary Accounts Receivable: Amounts due to a company for goods or services sold on credit. These are short-term assets. Aging: A procedure by which accounts are classified to determine collection time or delinquency (for example, current, 30 days past due, 60 days past due, etc.) Amortization: (1) The gradual reduction of a debt by periodic payments large enough to meet current interest payments and to repay the principal by maturity. (2) A method of gradually decreasing an asset book value by spreading its depreciation over time. Annual Percentage Rate: The total financing cost expressed on an annual basis as a percentage of the amount of the loan outstanding at all times. The APR is computed by a standardized method required by the Federal Reserve Regulation Z. Capital: The funds invested in a company on a long-term basis. These funds are obtained by issuing preferred or common stock, retained earnings, and long-term borrowing. Clean Up: Used to describe a loan payout or out-of-debt period by the borrower. Collateral: Specific property, securities, or other assets pledged by a borrower to a lender as a backup source of loan repayment. Compensating Balances: A demand deposit collected balance, kept on deposit by a customer, designed to offset the expenses of the bank for activity or lines of credit. Contingent Liability: Any obligation for which a party is not directly or immediately responsible for payment, but that party can or will become responsible at some future time. Corporate Borrowing Resolution: A formal document expressing the intention of a corporation board of directors. Covenant: A promise by one party to another regarding the performance or nonperformance of certain acts, or a promise that certain conditions do or do not exist. Depreciate: (1) In accounting, the process of periodically reducing a fixed asset book value by charging a portion of the asset cost as an expense to the period in which it provides a service. (2) To decrease in service capacity or usefulness. Fixed Assets: Those items of a permanent nature required for the normal conduct of a business and not converted into cash during a normal fiscal period. Fixed assets include furniture, buildings, and machinery. Guaranty: A pledge to make good a note or security in case of default by the borrower. Although the original debtor is responsible for the debt, a guarantor becomes liable in the event of a default. [...]... to the effective operation of a business Letter of Credit (L/C): A financial instrument, issued to a company or person by a bank that substitutes the bank credit for the company credit A letter of credit is frequently used by companies ordering goods from foreign suppliers with whom they have no credit relationship As a short-term negotiable security, a letter of credit can then be sold by the foreign... credit relationship As a short-term negotiable security, a letter of credit can then be sold by the foreign recipient Letter of Credit, Standby: A letter of credit against which funds can be drawn only if an underlying business transaction is not performed Letters of Credit, Commercial: Unconditionally guarantees to pay the beneficiary a specified amount within a certain period of time Loan Agreement:... Mortgage Loan: A loan used to finance construction of single-family houses, condominiums, cooperatives, homes and business properties A mortgage loan is collateralized by real property, such as farms, private residences, commercial land and buildings Pro Forma Statement: A financial statement that assumes future events in order to project conditions of the company as a result of these events For example,... sales to project anticipated income Secured Loan: A loan against which a tangible asset has been pledged in case of default on the loan Security Agreement: An agreement between a seller and buyer stating that the seller will have a security interest in the goods traded Working Capital: Calculated as the excess of current assets over current liabilities, but in effect it represents the portion of the long-term . FINANCING OPTIONS TO HELP YOUR BUSINESS GROW Financing Options to Help Your Business Grow A business loan at the right time, and with the right lender, can pull your organization. Once your loan is approved, you can use the funds for purchases and investments that will help grow your business, such as: • Buying, leasing or renovating a building for your business. history. This is a short-term financing option, and can help your business maintain cash flow or pay for equipment or other needs to help your business grow. Line of Equity Some entrepreneurs