Tag Archive: business_funding

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.

Understanding its advantages and disadvantages of Venture Capital Funding

Understanding its advantages and disadvantages of Venture Capital FundingUnderstanding its advantages and disadvantages of Venture Capital Funding

Understanding its advantages and disadvantages of Venture Capital Funding. Before taking on venture capital, entrepreneurs must ask themselves a fundamental question – “Do you want to be rich or be king?” As Harvard Business School Professor Noam Wasserman explains, it’s difficult for founders to maintain control over their businesses once they take on outside investors. However, without them, such businesses like Twitter and Facebook would likely have never have taken off. For those entrepreneurs who have developed a product with a large untapped market and a potential for rapid, high growth, venture capital (VC) funding makes sense if you’re willing to give up some control and most likely sell your business at the end of the investment period, or fund life-cycle (i.e. when the fund becomes due). However, if you would like to build a generational business, an angel investor may offer more favorable terms that will allow you to receive some equity while maintaining a degree of control.


Looking for that big return

“A VC firm does not invest in a business,” explains investment banker Jeff Koons of San Francisco-based Vista Point Advisors. Instead, it invests in a company that will sell for a lot more than it’s worth at the time of the initial investment. And such firms are looking for a big return (up to 20 times the initial investment) in a relatively short amount of time (3 to 10 years, depending on the fund life-cycle). “If your business is growing just 20 to 30 percent per year, VC funding is not for you,” notes Koons. Focusing primarily on the tech sector, Vista Point acts as a broker to bootstrapped entrepreneurs entering the VC world for the first time. “We help them think through the process from valuation to exit,” notes Koons.


Defending your interests 

Vista Point vets various VC firms for the best valuation and possible outcome for the entrepreneur. Unlike others in their field, Vista Point only works on the “sell side,” meaning their sole clients are entrepreneurs. They do not work with VC firms on other deals. “VC firms sometimes look for a break in the negotiations on these smaller deals for the promise of future work for the investment bank on more lucrative deals down the road,” cautions Koons. So a good rule of thumb is to ask any investment brokers if they work on the “buy side,” with VC firms, as well.


Having sound advice makes all the difference when entering the complex world of equity financing. Joshua Mag, CEO of SquareHook, a content management system provider, consulted a former professor who is an operating partner at a large VC firm before taking on equity from an angel investor in June 2012. “Potential investors want to know what market you’re targeting and its size,” notes Mag. “They’re not going to invest in something that doesn’t produce a large return, so there needs to be a big potential market for your product.” The angel investment allowed Mag to quit his full-time job to focus exclusively on building his business, which included hiring a few employees and seeking development assistance. “My decision to take on capital was a choice of acceleration,” explains Mag. “Had I not taken on the capital, this would have been a slower task.”


Equity comes at a price

Mag gave up 20 percent of equity of his company in exchange for the angel investment; however, a VC investor typically wants at least 20 percent ownership in addition to a board seat and the ultimate sale or IPO of your company upon exit. Nevertheless, how much ownership an entrepreneur gives up, whether to a VC or angel investor, is largely determined by the amount of equity the entrepreneur needs, the valuation of the business, and whether it’s the first, second, or third round of investment.


Aaron Skonnard, CEO of Layton, Utah-based Pluralsight, grew his company’s online training platform for software developers organically for about a decade before taking $27.5 million in Series A funding in 2012. “We saw periodic interest over the years from investors,” notes Skonnard. “But we thought it was too risky to give up too much control in case we needed to change direction.” It was only when Skonnard and his partners felt they had a solid business model and were set to enter a high-growth mode that they decided to take on VC funding

Shop around

“It wasn’t so much about the money as forging those strategic relationships,” Skonnard points out. “Once we decided, then it became a financial exercise –– how much do we take, how much do we want to sell, and who’s the right partner to go with.” Skonnard and his partners met with five or six VC firms several times before they decided on one they believed would add the most value to their business. “It was our comfort level with the people and personalities that drove our decision more than the financial metrics,” explains Skonnard. “Make sure you’re happy with the people that will be on your board of directors.”


Investors provide more than just cash

While the cash infusion helps grow your company, partnering with a VC firms also gives you access to new players in your industry, which in turn helps attract the top talent and increase your market presence. Pluralsight’s traditional model had been to work directly with content producers to build its online training library. But with the funding, it was able to finance the purchase of two online training companies, which doubled its content library in a matter of months. “The Series A really unlocked our ability to make those acquisitions,” Skonnard points out. “We would have never been able to consider that without such funding.”


Beyond their connections in financial and sector-specific industries, some VC investors have an entrepreneurial background as well. Brendan Anderson bought his first business in 1995 and has helped manage and invest in many more since then. In 2006, he co-founded Cleveland, Ohio-based Evolution Capital, which invests in $5- to $6-million companies that have at least $500,000 in free cash flow. “We are point-in-time investors looking for entrepreneurs/founders with a vision creating something compelling in the market,” explains Anderson. He and his partners then work with these entrepreneurs to implement the steps needed for growth.


These include getting the entepreneurs’ financials in order to develop a plan for growth, which in turn enables these businesses to attract the best people. Next is transparency, making sure the entrepreneur communicates his vision and shares day-to-day operational data with employees. Finally, holding the entrepreneur and employees accountable for tasks that will move their company forward. “Once these best practices are implemented, they’re happy with the results,” Anderson points out. “But the process of doing it is usually painful.”


“The founder/entrepreneur still owns a major piece of the business even after we invest,” Anderson points out. However, Evolution Capital typically controls the majority interest (more than 50%) and maintains the right to change management and control their exit (with a typical investment ranging from 3-7 years). “We want to build businesses that continue to grow long after our ownership,” he says.


Understanding terms, conditions, and valuation

If you’re considering taking on equity, it’s critical to understand the terms and conditions of any investment agreement. Whether the entrepreneur maintains some control is largely determined by how the deal is structured. Mag decided to go with an angel investor, who was looking for a longer investment with annual dividends rather than a large payout at the end of a VC fund life-cycle. “Taking on VC means you need to have an exit strategy: IPO, sell, or dividends,” notes Mag. “Most VCs want a full exit to collect on their return within a period that is reasonable.”

And that’s largely determined by when a business becomes part of the fund. “You want to be invested as soon as possible in the life of the fund,” explains Koons. “If there’s only two years left before the VC firm needs to return capital to their limited partners (i.e. investment occurs in year five of a seven year fund), a company could be sold for a loss or spun out even if it’s achieving its growth projections.” Understanding its advantages and disadvantages of Venture Capital Funding


Typically, investors are looking for preferred terms that will position them better than other parties (e.g. paid first upon exit, right of first refusal, put option, liquidation preference). Pluralsight has a minority interest deal with their VC investment firm, which has allowed Skonnard and his partners to only give up two seats on their seven-seat board. “The founders still control the board and the ultimate direction of our strategy,” notes Skonnard. “While we have a very healthy relationship with our new board members, we didn’t want to give up too much control.” Understanding its advantages and disadvantages of Venture Capital Funding


It’s also important to understand valuation, as you need to know what your company is worth in order to negotiate the best terms. “One way to valuate your business is to look at your competitors to see what they sold for upon exit,” explains Mag. There are a number of public sources and tools that list industry comparables. This will also help figure out how much equity you’ll need to put into your business to achieve your growth plans. “That investment defines what your business will be valued at,” explains Mag. “By taking on more than you need, your business is likely losing equity unnecessarily.” Understanding its advantages and disadvantages of Venture Capital Funding


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

5 Tips for Optimizing Your Cash Flow

5 Tips for Optimizing Your Cash Flow

Iris Dorbian.

5 Tips for Optimizing Your Cash Flow.  For a small business owner, managing your cash flow, (the movement of cash to and from your business as opposed to cash deposited in a bank) may be your most important responsibility. In fact, in a recent poll conducted by CPA2Biz, the marketing and technology services subsidiary of the American Institute of CPAs, 83 percent of the 500 small businesses surveyed reported that their prime concern is maintaining adequate cash flow.

And according to the Small Business Administration, the federal agency that provides support and resources to small business owners and entrepreneurs, the failure to manage cash flow is a significant reason why so many small businesses close their doors each year. Make no mistake about it: Even if it’s unintentional, just a mere oversight or misstep in your handling of the company coffers can cause untold damage to your reputation, brand, and credit rating. How then can you prevent such errors from happening while optimizing your cash flow? Here are five cash flow best practices that can steer you in the right direction. 5 Tips for Optimizing Your Cash Flow.

1. Negotiate with vendors

This takeaway can be a great method for pre-empting future financial headaches. If you’re experiencing a fiscal pinch, talk to your vendors about extending due dates. Or try re-negotiating payment terms. Remember, your vendors are also in business and they, like you, want to get paid on time.

John Burger, owner of the online toy company Playfully Ever After, has made this tip a key underpinning of managing his company’s cash flow. And based on his experience, most vendors are willing to be flexible if it guarantees payment. 5 Tips for Optimizing Your Cash Flow.

To bolster his point, Burger, whose company is based outside Dallas and has seven employees, recounts an experience where re-negotiating with a vendor garnered positive results.

“We hit a cash-flow crunch after spending quite a bit of money at the Toy Fair 2013 expanding into new toy lines,” he recalls. “There was no way we could place the large orders we needed to make to sustain our top-selling brand. I called and talked with our rep and they were more than willing to work with us. In fact, they even offered us special terms. From now on, we only have to spend $3,500 to get the same 10 percent discount or $1,500 to get a 5 percent discount. This meant we could reorder more frequently and keep items in stock, which increased sales for both of us.”

OptimizeCash_PQ.jpg2. Build yourself a cushion

Almost every business goes through an up-and-down cash cycle. Such fluctuations can often be dictated by myriad factors that range from seasonal trends to the overall health of the economy. During periods when your cash flow is booming, don’t get complacent and risk your business with extravagant or unnecessary expenses. Be prudent in your spending and start saving for those periods when money might not be flowing like champagne. 5 Tips for Optimizing Your Cash Flow.

Adrienne Polk, operations and strategy manager of the Washington, D.C-based Ross Business Management, a provider of financial and operational solutions to small businesses, agrees. “You want to create a buffer along the way, not just once in a while,” she says. “This will allow you flexibility and more breathing room in your business. When you are down to the wire all of the time, it can be completely paralyzing. Although you may need to spend money to make money, if you are paralyzed by fear or lack of funds, your business will suffer.” 5 Tips for Optimizing Your Cash Flow.

3. Trim unnecessary expenses

If you want to attain a strong grasp of your cash flow, then it behooves you to make a thorough and detailed assessment of the items that can be cut from your balance sheet and what can stay in. Scrutinize your expenses. Figure out what is essential and what can be excised.

don’t have to buy the employees lunch, take a client golfing, or spend money on a birthday cake,” Burger explains. “Those types of things can wait. It’s more important that your employees get paid and you have money to buy product.”

4. Request prompt payment of services

This might sound like a no-brainer solution to cash flow problems, but it bears repeating when dealing with vendors and/or clients. 5 Tips for Optimizing Your Cash Flow.

Andrew Schrage, co-owner of Money Crashers, a personal finance website, agrees, but notes that debtors might need to gain an incentive to ensure prompt payment. “To motivate debtors to pay quickly, offer a small discount for prompt payment,” he says. “So even though you may take a bit of a hit on profits, it’s ultimately worthwhile.”

5. Tighten up employee hours during slow times

To better optimize your cash flow, you might consider reducing hours for employees during the slow periods. This tip has worked wonders for Burger’s Playfully Ever After staff. When his business was experiencing the doldrums, Burger had his hourly staff start work one hour later. And on days that were especially slow, staffers were told to go home earlier than expected.

“This saved an extra $600 a month in payroll,” he explains. “Every bit helps.”

Along the same lines, if your cash flow problems are growing increasingly dire, short of terminating your staff, you might also want to change employees’ salary status to an hourly basis. “Most employees hate this and it can be a tough sell,” admits Burger. “But it allows you to save money on slow
times when employees may not be working as much. If your business is in jeopardy, this is an option you should think about.”

Other ways to solve your cash flow problems courtesy of Burger are as follows:

Offer one free vacation day instead of pay raises. “To improve cash flow for the next year, give everyone in the company an extra day off each month in lieu of pay raises,” he says. “I had an employer do this once, and at first people were upset, but then we learned to love having the first Friday off of every month.”
Establish a line of credit. “Talk with your banker,” advises Burger. “Most banks are more than willing to help you establish a line of credit for your business. You don’t have to use it all the time, but this can help when cash gets
tight.” 5 Tips for Optimizing Your Cash Flow.

To maintain the longevity of your business operations, it’s imperative to manage your cash flow as wisely as possible. In this area, there’s no room for carelessness or irresponsibility, especially if you want your business to survive the long haul. 5 Tips for Optimizing Your Cash Flow.

Borrowing Money from Family and Friends To Start Your Business

Borrowing Money from Family and Friends To Start Your Business

by Susan Caminiti

Borrowing Money from Family and Friends To Start Your Business.Chances are they’ve been your biggest cheerleaders as you’ve started and grown your small business. But should family and friends also bankroll your business?

Borrowing money from your parents, in-laws, or even your best friend from college may seem like an easy financial solution when capital is not forthcoming in those early days. But small business experts say this option can be more complicated—and emotionally messy—than it seems. “Most small business owners who go to family for money approach it like they’re about to borrow $20,” says Andrew Keyt, executive director of the Family Business Center at Loyola University Chicago. “The process is too informal and that increases the possibility of tension and misunderstandings with family members down the road.” Borrowing Money from Family and Friends To Start Your Business

Despite those potential pitfalls, small business owners continue to seek out money from those near and dear. A business financing survey by the Global Entrepreneur Monitor, a research consortium that includes Babson College, showed that small businesses raised $41.6 billion in 2010 in so-called informal funds. According to the respondents, 32 percent said the money came from a friend or neighbor; 26 percent said from a close family member; 11 percent from some other relative; and eight percent from a work colleague.

Still, there are ways to borrow seed money from family and friends without making the next holiday gathering stressful and awkward for all involved. Below is some advice from small business experts on how to do it right. Borrowing Money from Family and Friends To Start Your Business

Be clear, candid, and professional

If there’s one topic that people are uncomfortable discussing, it’s money. Talking about money to family only notches up the pain. So says Karen Axelton, co-founder of GrowBiz Media, a market research and consulting firm that helps corporations and government agencies connect with small and mid-size businesses. “Glossing over the details of how much you need and why, because it’s awkward to talk about money with your parents or siblings, is never a good idea,” she says. Borrowing Money from Family and Friends To Start Your Business

FamilyFinancers_PQ.jpgRather, treat the conversation as if you are having it with a stranger—or better yet—a banker. Arrange a time to speak that’s good for everyone and focus only on the issue at hand. Explain the amount of money you’re looking for, your plans for the funds, and how you intend to pay the money back and over what period of time.

It also helps to present potential lenders (yes, even mom and dad) with a detailed business plan. Says Keyt: “Even your closest relatives will want to know if the money is going to some half-baked idea or a business that has a chance to succeed.” Give them time to read it over—preferably without you looking over their shoulder, cautions Axelton. And above all else, Keyt advises, be clear. “Problems arise when both parties have unarticulated expectations. Leave as little as possible open to misunderstanding.”

Define the investment

Are you looking for a loan, equity investment, or an outright gift? Each has a different set of issues—and financial responsibilities—so making sure you define the terms is critical, says Axelton.

With a loan, you’ll want to determine the interest rate you’ll pay on the money you’re borrowing, the repayment period, and what you’ll use the money for. An accountant can draw up these forms, or you can find them through an organization such as SCORE, she says. Borrowing Money from Family and Friends To Start Your Business

Unlike with a bank loan, when the money is coming from mom and dad or the in-laws there’s often wiggle room with the repayment schedule. Pretend there isn’t. Judy Barber, a family business consultant and mediator based in San Francisco, says even if family members don’t need the money repaid on time—or at all—changing the terms of a loan is never a good idea. “It annoys parents because it makes it look like their adult children aren’t taking them or the business seriously,” she says.

Money that comes in exchange for an equity investment is a bit more complicated and will require some soul-searching, say the experts. For instance, do you really want your business savvy father-in-law weighing in on expansion plans or questioning your social media strategy? “Those are the kinds of questions that entrepreneurs have to ask themselves if they’re taking money in exchange for a piece of their company,” says Keyt.

An equity investment also comes with a fiduciary responsibility to share financial data with investors, and in most cases, make them board members. “If you’re going this route, make it clear what percentage of the company they are getting in exchange for their investment and the liquidity options they have when they want to get their money out,” Keyt explains. Also make clear whether or not you’ll be paying dividends to these shareholders and if so, how often. And get professional guidance. Both Keyt and Axelton recommend using a lawyer to draft an equity investment agreement. Borrowing Money from Family and Friends To Start Your Business

As for gifts, well, they too have to be handled with care. To begin with, says Barber, make sure everyone involved understands that the money is just that: a gift, with no expectation that it will be paid back. Further, be sure to stay on top of IRS gifting guidelines. For 2013, the amount of money someone can give as a gift, tax-free, is $14,000, up $1,000 from last year. And of course, the money is not considered taxable income for the recipient.

Put it in writing

Just because these are the people who love you most in the world, doesn’t mean you get to take short cuts when it comes to money. Put everything in writing. “Family and friends are naturally excited for you and optimistic about your chances for success,” says Axelton. Bring everyone back down to earth with a written document that makes clear the terms each party has agreed to, she advises. Enlisting the services of a lawyer is advisable, but not always needed when drafting this kind of agreement, but getting any contract or written agreement notarized is recommended. Borrowing Money from Family and Friends To Start Your Business

It’s also a good idea to include in this document a list of the risks that the lender is taking on by loaning you the money or making an equity investment in your fledgling company. “Not every business succeeds and it’s up to the small business owner to lay out a worst-case-scenario plan,” she says. “What if the business fails and it takes you double the amount of time to repay a loan? Or you can’t repay it at all? You need to set down expectations in writing so everyone knows what the risks are.”

Maintain communication

No, you don’t have to send out daily emails detailing the new client you just snagged or that you’ve hired your third employee. But when you see or speak with your family investors (and you will) give them a brief, honest assessment of how the business is doing and any highlights, say the experts. And of course, if there are dire problems that could impact your ability to start or continue repaying your loan, alert them to that sooner rather than later, says Barber. Borrowing Money from Family and Friends To Start Your Business

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.