Tag Archive: business_line_of_credit

Five Steps to Business Credit

 Operating without loans can have significant impacts on your cash flow and working capital and does nothing extra to build your business credit. Five Steps to Business Credit

Maintaining good business credit is essential, as a bad credit rating may severely hinder your business growth and expansion. Without good business credit, banks can be less likely to accept your loan applications. Operating without loans can have significant impacts on your cash flow and working capital and does nothing extra to build your business credit.

 

In addition, if you skirt your financial responsibilities, it’s unlikely that suppliers will extend your business a trade or credit account. That means that you may lose the ability to leverage the 30-, 60-, and 90-day terms of invoices as short-term loans. In addition, many businesses enjoy discounts provided by suppliers to encourage prompt payment; cash customers usually do not get such discounts.

 

If your business does not have good credit, you can take steps to repair it. The first step to building your business credit is to contact your creditors to set up payment schedules. Such schedules should be reasonable and fair to both your business and the creditor. If you have some history of paying bills promptly, you may find that creditors are willing to set up alternative payment schedules. In addition, successful completion of a payment schedule often leads to a continuing relationship between businesses and creditors.

 

Late payments or unpaid invoices can often be traced back to housekeeping or paperwork issues rather than cash flow problems. Even these types of mistakes can affect your business credit.

To determine the root cause of the problems ask yourself:

  • Are your creditors sending invoices to the correct address and person?
  • Are your payment checks being sent to and received by the correct department and person?
  • Are all parties clear on when payments must be made?

 

Additionally, listed below are steps you can take to improve your business’s creditworthiness:

  • Always pay on time. The ability to repay loans promptly has a great impact on business credit scores. You should endeavor to always pay within the terms you have with your suppliers. On-time payments are the most direct way to improve a business credit rating.
  • Pay your biggest bills first. Some business credit scores are dollar weighted, such as the PAYDEX ® Score. Therefore, if you are consistently paying all of your smaller bills but neglecting your largest, your Paydex score can suffer.
  • If timely payments to suppliers and lenders are not included in your business credit profile, your business may not get the credit it deserves for paying your bills on time. You should monitor your business credit profile at least twice per year to ensure that vendor payment relationships are included.
  • Stay on top of your business credit profile. You must ensure that your business credit profile information is complete and accurate. Address any inaccuracies immediately. Certain business credit companies offer customer services and online tools that can help you update and manage such details.
  • Contribute to your company’s credit profile. You can communicate to the credit bureaus as well. The more information you give to credit bureaus like D&B, the more robust your business credit profile will be. In addition, try to choose suppliers and vendors that report their experiences to credit bureaus, which can also boost your profile.

Many businesses are feeling the pressure of tightened credit requirements. However, by carefully planning and executing your plan, you can help fix and improve your business credit.

How Much To Ask When Applying For A Small Business Loan

How Much To Ask When Applying For A Small Business LoanHow Much To Ask When Applying For A Small Business Loan

It’s a question that besets many small business owners when applying for business loans: how much should I ask for? More so than deciding on which lender to approach, not having a sound estimate of how much capital you need to borrow could lead to cash flow problems—which could lead to your business shutting down. How Much To Ask When Applying For A Small Business Loan

How then can small business owners determine how much financing they need when approaching lenders? What factors should they take into account when calculating the ideal sum of their business loan?

Be clear on the reason for the loan

Are you launching a startup? Or do you need the loan as additional working capital to make improvements in your business? Answering yes to either question is critical when deciding on how much you need.

Denise Beeson, a small business-funding consultant who previously lent her services to a local SBA-administered Small Business Development Center, a provider of mostly free resources and training to small business entrepreneurs, in Santa Rosa, California, always asks her small business clients the previous questions whenever they come to her about wanting to apply for loans. For those with startups, she does issue a caveat: “If this is a start-up, I remind them that an SBA preferred lender does not fund startups,” says Beeson “We then discuss where they may find funding, such as peer-to-peer lending options, tapping into their personal resources, or asking family and friends.”

If the small business owner is seeking to buy a business from another, Beeson notes that the seller may fund the loan. How Much To Ask When Applying For A Small Business Loan

 

Also, if the small business owner is seeking working capital for myriad reasons, which might include increasing the marketing budget, making renovations, or paying off debt, Beeson says she will ask clients if they can produce documentation verifying that the debt was accrued as a result of the business.

 

Without providing the necessary paper trail needed to accompany a loan application, small business owners could hurt their chances of getting financing from a lender, insists Beeson. To prove her point, she offers the following anecdote:

 

“Recently a restaurant client was interested in an SBA loan to consolidate debt based on improvements to the premises,” she recalls. “They had almost $100,000 in debt including credit card debt that was claimed as accumulated to the business during the recession. However, when we looked at the statements, the entries were not clear when and what had been done. In addition they could not produce any paid invoices from contractors or suppliers linked to the credit card statements. Unfortunately, we could not move forward because the borrower could not provide the needed documentation to the preferred SBA lender.” How Much To Ask When Applying For A Small Business Loan

Consult trusted financial professionals

If you are unsure or confused about how much you should ask for when applying for a business loan, it might behoove you to visit a financial expert such as a reliable bookkeeper or a CPA that regularly deals with small business clients. By reviewing your financials, he or she can then approximate how much financing you will need, taking into account existing debt obligations and operating revenue. And a word of caution: don’t be lax or lazy when it comes to understanding your financials. Sloppy bookkeeping or a lack of knowledge about your books or tax returns will prevent you from acquiring a loan.

Take into account your other non-related business expenses

To determine how much you’ll be able to repay and the length of the loan’s duration, small business owners need to do a cash flow analysis of all their expenses, including mortgage payments or auto loan payments. By doing so, a business owner will be able to develop a more viable estimate of how much they’ll need to borrow from a lender.

 

Rohit Arora, CEO of the six-year-old Biz2Credit.com, feels this is an imperative step for all small business owners to take when deciding on how much of a loan they should apply for.

 

“A lot of business owners don’t take [their miscellaneous non-business expenses into account when deciding how much money they should borrow,” he says. “Everything boils down to your repayment capacity. So if you feel that you can borrow some money and there’s some good opportunity that will help you make money off it, that’s good. But that calculation is not a certainty.” How Much To Ask When Applying For A Small Business Loan

Carefully consider payment terms

After you analyze your financial situation, both on a personal and business level, you will also need to decide on how long you want to pay off your loan. By following this best practice, you will be able to produce a rational figure as opposed to an amount that you will never be able to discharge in light of your finances and debts.

Arora agrees, offering a hypothetical scenario: “Let’s say a business owner is borrowing $100,000 and they have to pay back everything in one year,” he explains. “Then the amount of repayment they have to make in terms of speed is pretty steep. Typically for small businesses, the cash flow is their bloodline.”

Similarly, Arora says small business owners need to exercise extreme caution, particularly if they’re planning on borrowing from alternative lenders. “A lot of times they want their money back pretty quickly,” he warns.

Know the lender

When figuring out how much money you need to borrow, it’s vital that you research your lending options. Which banks or lenders are amenable to small business owners in your sector? Just conjuring up a random number for a loan will not help you if the lender is not open to your industry, says Beeson, who advises business owners to also explore nontraditional lending options.

If you need to figure out how much of a business loan you should ask for, you will need to know offhand all of your business and non-business expenses. Not only is this information essential for maintaining good credit—a prerequisite for getting a loan—but it will help you come up with a realistic number that will allow you to comfortably fulfill repayment terms and not disrupt your cash flow. How Much To Ask When Applying For A Small Business Loan

Navigating the SBA Loan Process: Q&A with Charles Green

Navigating the SBA Loan Process: Q&A with Charles Green

Posted by SBOC Team in Financing Tipson Nov 2, 2012 8:04:36 AM

QAcharlesgreen_Body.jpgby Jen Hickey.

Business writer Jennifer Hickey recently spoke with Charles H. Green, who spent 30 years in the commercial banking industry and is now the executive director of the Small Business Finance Institute, an Atlanta, Georgia-based nonprofit that helps business owners improve financial management and access to funding through annual conferences, monthly workshops, and a weekly webinar series on various topics. He is also the author of the SBA Loan Book, now in its third edition.

 

JH: What role does a bank or lending institution play in administering SBA loans?

CG: The Small Business Administration (SBA) does not make the loan directly but serves as a guarantor for the loan up to a certain percentage depending on the program. The intention of the program is for lenders to make loans under their existing lending criteria or policy. If a loan can be approved without the guaranty, it should be. If it cannot be approved due to being outside loan policy and is a prudent loan likely to be repaid, the lender can proceed with the guaranty. The guaranty is intended to shore up a loan for borrowers who would not otherwise be able to get a small business loan, as their collateral levels, requested leverage, credit score, or repayment terms, etc. fall outside that criteria.

QAcharlesgreen_PQ.jpgJH: How is an SBA-backed loan different from a traditional bank loan?

CG: Traditionally, bank regulators have discouraged financing beyond the horizon of which would be a safe risk. SBA-backed loans allow for longer term financing that banks would be discouraged from giving based on existing lending criteria. For example, an SBA loan allows a company that wants to purchase a building for manufacturing or retail purposes to finance the loan for up to 25 years. Bank regulation sees that as a long time to take a risk and commit money without knowing what the cost of funds will be, how well the business will do over time, etc. Yet, it’s impractical to think an asset that will be useful over 20 years can be repaid in three years. The SBA guarantee encourages the bank to make loans that would otherwise not be possible due to the regulatory environment.

 

JH: What types of provisions must be met for the most common types of SBA loan programs?

CG: The most commonly used is the 7(a) program, which provides a 75 percent guarantee for loans up to $5 million and up to 85 percent for loans under $175,000 until the loan has been paid in full. A loan backed by the 7(a) loan program can be used for any business purpose and the maturity is based on the use of proceeds. The loan can have a maximum term of up to 25 years if used for property and up to 10 years for equipment financing and seven years for working capital.

 

The second most used program is the Certified Development Company (CDC)/504 loan program, which provides subordinate financing directly to the small business and is administered locally through SBA-licensed nonprofit CDCs. A 504 loan can only be used for capital improvements, like the acquisition or construction of capital assets such as property or major equipment. It is not a guarantee like the 7(a) program but a funding augmentation. The SBA actually participates in the funding of this program by selling debentures, which serve as a subordinate piece of the total financing (up to 40 percent), while the CDC funds a minimum of 50 percent of the transaction.

 

The SBA Express program allows for the funding of much smaller initiatives, up to $350,000 ($500,000 for qualified veterans) and carries a smaller guarantee by the SBA, generally 50 percent (75 to 80 percent for veterans). While the program target is working capital, it can be used for any business purpose. Express loans are fast-tracked; there are fewer forms required from lenders to the SBA, and lender is allowed to use their own loan documents to close the deal.

 

JH: What’s the difference between a preferred, standard, and certified SBA lender?

CG: This refers to the status or recognition of the lender by the SBA. A “standard” lender is one that is qualified to make an SBA loan, having entered into an agreement with the agency that allows it to submit transactions for review and receive a guarantee on the credit if approved by the SBA. Once the lender gets some experience and demonstrates its ability to follow the rules and generate decent volume, it can become “certified,” which puts its deals in the front of the line. With “preferred” status, the SBA actually allows the lender to make the decision whether to use the guarantee or not, and in many cases, the loan can be approved the same day. With standard and certified lenders, the SBA checks for eligibility and also reviews the lender’s application to ensure the loan is underwritten with a high degree of certainty that it meets SBA credit standards. With a preferred lender provider (PLP), the SBA only checks the lender’s justification of eligibility for the borrower, not their underwriting.

 

JH: Explain some of the different eligibility requirements for obtaining an SBA loan?

CG: A small business has to be “active,” meaning that it is directly involved in economic activity. Businesses involved in passive investments, third-party financing, or speculative business activity would not be eligible. And the loan must be used for legal business purposes, of which there are restrictions; it cannot be used be used for gambling-related activities, lending, multilevel marketing, real estate investment, charities, among others.

 

A borrower has to fall under the SBA’s definition of a small business, as described under the North American Industry Classification System (NAICS), which places a limit on specific industries based on number of employees and revenue levels. In general, businesses with fewer than 500 employees, or less than $7.5 million of annual revenue, are considered small businesses, though there are hundreds of differences within those generalizations, depending on the industry. Some have more or fewer employees, while others have a lower or higher revenue ceiling. For example, a car dealership can have up to $33 million in revenue and still be eligible for an SBA loan. It depends on the relative numbers in that particular industry.

 

The borrower must be a legal U.S. resident (i.e. a citizen or approved status) and has to be current on his/her income taxes and/or child support. In the SBA Business Loan Application, applicants must acknowledge and confirm they are in compliance with several statutes ranging from the Lead Based Paint Poisoning Prevention Act to the Right to Financial Privacy Act. The “other resources” rule states that if a borrower has a certain level of resources available to them, they would not be eligible for SBA financing. So, if a business has more than $2 million in cash, it would not be eligible for an SBA loan since it would qualify for financing elsewhere.

 

JH: Is there any additional documentation or collateral required for an SBA loan vs. a traditional business loan?

CG: The “paperwork” reputation of the SBA is overblown and concerns lenders not borrowers. The credit decision to make the loan is ultimately made by the bank, although the SBA can decline guarantee for a standard program lender if the borrower really wasn’t eligible or didn’t demonstrate the ability to repay the loan adequately. A loan may be rejected if, in the view of the agency, the projected financial results can’t be justified by either past performance of the business or with the accompanying business plan that sets forth how the financial objectives will be achieved.

 

The SBA loan program stipulates that if borrower collateral is available, it must be put toward the loan. For example, if the borrower is using loan proceeds to buy a building for its business, then that building would be put up as collateral for the loan. But there’s no firm rule on how much collateral is adequate. The SBA expects the bank to apply the same requirements as they would for any other type of business loan; however, there’s more flexibility with an SBA loan when it comes to collateral, credit scores, etc., if the financial projections are sound and based on real numbers.

 

http://smallbusinessonlinecommunity.bankofamerica.com/community/growing-your-business/loansandlinesofcredit/blog/2012/11/02/navigating-the-sba-loan-process-qa-with-charles-green