Where to Find the Best Short-Term Business Loans in 2017

This guide will help you decide whether a short-term business loan is the right move for your company and how to get one that meets your needs.

You’ll learn:

Part I: Explaining Short-Term Business Loans

Whether you’re running your own business or you have a small team of employees, at the end of the day everything falls on your shoulders as a business owner. Every opportunity is yours to take. Every problem is yours to solve.

And the truth is that both opportunities and problems often require cash. Cash to buy more inventory. Cash to market your services. Cash to get you through a rough patch.

But sometimes the cash isn’t there when you need it. And that’s where a short-term business loan can be helpful.

Short-term business loans give you access to money quickly so that you can address your immediate need and pay the loan back with the revenue you earn over the next several months.

They essentially act as a bridge, allowing you to get from Point A to Point B even if you don’t have the cash on hand to do it yourself.

Recommended short-term business loan options

You have a lot of lenders to choose from when looking for a short-term business loan, and you should expect to spend some time sorting through them to find the best option for your personal needs.

Here are a few good options to get you started, and you can refer to the following guide for even more: 17 Options for Small Business Loans.


OnDeck

 

  • Website: https://www.ondeck.com/short-term-small-business-loan
  • Max loan amount = $500,000
  • Loan terms from 3 to 36 months
  • Annual interest rates start at 9.99%, with an average annual rate of 49.7%
  • 2.5 percent to 4 percent origination fee
  • Eligibility requirements
    • 1+ years in business. The average customer has been in business for 7 years.
    • $100,000+ annual gross revenue. The typical customer has $450,000+ annual gross revenue.
    • 500+ credit score. The majority of customers are at 660+.


RapidAdvance

  • Website: http://www.rapidadvance.com/sba-bridge-loan
  • Max loan amount = $1,000,000
  • Monthly fees from 10 percent to 50 percent
  • Eligibility requirements
    • 2+ years in business
    • $5,000+ monthly gross revenue
    • 600+ credit score


National Funding

 

  • Website: https://www.nationalfunding.com/solutions/short-term-business-loans
  • Max loan amount = $500,000
  • Loan terms from 6 to 12 months
  • Fees from 24 percent to 80 percent
  • Eligibility requirements
    • 1+ years in business
    • $100,000+ annual gross revenue
    • No defined minimum credit score, but representatives indicated that 465-480 was the lowest they have previously seen qualified
    • 3 months’ of bank statements


Kabbage

Compare small business loans online

These sites are great tools for small business owners looking to compare offers from several small business lenders all at once. They typically ask for some key info about your business and the type of loan you are looking for, then match you with lenders that fit your needs.


Fundera

*As Fundera notes on its site, these are general qualifications. In a study of the borrowers who shopped on Fundera and successfully secured business loans, the site found they typically had a 600 credit score, annual revenue of $150,000, and were in business at least two years.


LendingTree

Website: https://www.lendingtree.com/business/small/

      • Eligibility requirements:
      • 1+ years in business
      • Credit score, revenue and other factors will be evaluated independently by each lender

    Disclosure: LendingTree.com is the parent company of MagnifyMoney.

SBA Lender Match

Website: https://www.sba.gov/lendermatch

4 smart ways to use a short-term business loan

Source: iStock

Taking on debt should almost never be your first option, but there are a few situations in which a short-term business loan can make a lot of sense.

1. Buying More Inventory

Maybe you’re just starting out and you need to buy the inventory you’ll eventually sell. Or maybe you’re gearing up for a heavier sales period than usual.

Whatever the case, there are times where you need to buy more inventory and you don’t have the cash on hand to cover it. And as long as the expected revenue exceeds the amount you’re borrowing, plus interest, paying the loan off quickly shouldn’t be an issue.

2. Opening a new location

Opening a new store or a new office has the potential to grow your business by leaps and bounds. More locations means more opportunities to serve more people.

But it can cost a lot of money to open a new location. A loan can help you get it up and running, with the revenue produced by that new location being used to pay off the loan.

3. Hiring employees for the busy season

A lot of businesses need extra workers at certain points in the year. Think vacation destination restaurants in the summer or retail stores during the holidays.

A short-term business loan could help you hire those extra employees ahead of time, ensuring that you have all the help you need to take full advantage of the busy season.

4. Getting through a financial emergency

Unfortunately, business isn’t always booming. Sometimes you hit a rough patch, business is slow, and there isn’t enough revenue to cover all your expenses.

Taking on debt to address financial difficulties is risky. A loan is an additional financial burden that could make your problems worse.

But if you have good reason to expect a turnaround in the near future, a short-term loan could help you keep the lights on in the meantime.

Pros of Short-Term Business Loans

While a short-term business loan isn’t always the right solution, these loans do have a few advantages over other forms of financing:

  • Fast approval process – Certain online lenders will issue approval in just a few hours and deposit the money in your account in as little as 24 hours. If you need money fast, that could be the way to go.
  • Build your business credit – Short-term business loans are often available to businesses with little to no credit history. This both allows you to borrow money when other avenues are unavailable to you and to build a credit history that makes it easier to qualify for bigger loans down the line.
  • Take advantage of business opportunities – Because of the fast approval process and less stringent credit requirements, short-term business loans often allow you to take advantage of business opportunities that otherwise wouldn’t be available to you. This can sometimes make the difference between a business that fails and one that succeeds.
  • Match your borrowing needs – It doesn’t make sense to take out a 10-year loan if you just need help buying inventory you’ll sell in the next few months. Getting a short-term loan allows you to get the money you need and pay it back quickly so that it isn’t a burden any longer than it needs to be.

Cons of Short-Term Business Loans

While short-term business loans can be helpful in the right situations, they have a few characteristics that should make you think twice before taking them out:

  • Typically smaller loan amounts – Many short-term business loans are capped at $500,000 or less. If you’re in need of more than that, you may need to find a different form of financing.
  • Higher APR – Short-term loans typically have higher interest rates than longer term loans that come with longer application processes and stricter eligibility requirements. You’re paying the interest over a shorter time period, but it can still be an expensive way to access money.
  • Could be subject to daily/weekly payments – Shorter loans also come with more frequent payments. Many lenders require daily repayment, and even weekly repayment could be difficult if you won’t get the revenue right away.
  • Can lead to spending beyond your means – Due to the ease and speed with which you can obtain these loans, there’s a risk of developing a dependency upon debt that leads you to spending more than your business can truly afford. While debt can be helpful on occasion, it is not a sustainable way to run a business.

Short-term loan vs. line of credit

A line of credit is a popular alternative to taking out a short-term business loan, and there are situations in which it can be the better option.

A line of credit is an amount of money that a lender makes available to you to borrow. But unlike a loan, you don’t receive the entire amount right away. Instead, you are allowed to borrow money as you need it, up to the maximum amount, and you only pay interest on the amount you have actually borrowed.

According to Cathy Derus, CPA, a financial planner and the founder of Brightwater Financial in Chicago, the main advantage of a line of credit is the flexibility it provides. You borrow only what you need when you need it, allowing you to more precisely match your debt with your expenses.

The flip side, Derus says, is that a line of credit typically comes with a higher interest rate. If you are fairly certain of the amount of money you need, a short-term loan often allows you to borrow it at a lower cost.

Interest rates always depend on the lender you use and the specifics of the situation, so these aren’t hard and fast rules. But generally you can approach this decision like this:

  • If you’re unsure of the amount of money you need, or if you don’t need it all at once, the flexibility a line of credit provides may be worth the extra cost.
  • If you have a specific amount of money you need right now, a short-term loan may be the cheaper option.

PART II: Qualifying for a Short-Term Business Loan

Source: iStock

What it takes to qualify for a short-term business loan

Every lender has a different set of standards and will evaluate your business a little differently. But Derus says that there are three main factors that almost all lenders consider when deciding whether to offer you a loan, and on what terms:

  1. Time in business – Businesses that have been around for a longer period of time are less likely to fail and are therefore considered less risky. Older businesses are therefore generally able to qualify for larger loans at preferable rates.
  2. Credit history – Just like applying for a personal loan, lenders prefer long credit histories that show consistent, on-time payments. One of the benefits of short-term business loans is that you can often qualify without an extensive business credit history, but in that situation your personal credit will be scrutinized more closely and you may be held personally liable for the loan if the business can’t pay it back.
  3. Financial health of your business – The lender will look at bank statements and financial reports like profit and loss statements and your balance sheet to make sure that your company has the financial resources to pay back the loan. Most lenders specify a minimum gross revenue in order to qualify.

Lenders may also look at things like the industry you’re in, the amount of equity you personally have in the company, other debts or liens against the company, and even your business plan so they can feel confident you’ll use the money well.

Questions to ask before shopping for a short-term loan

Given those criteria, how can you put yourself in the best position possible to qualify for a favorable short-term business loan? Here a few questions you can ask yourself:

  • How long have you owned your business? The longer you’ve been in business, the more likely it is that you’ll be able to borrow the money you need at a reasonable cost.
  • Do you have organized and consistent financial reports? You’ll need to provide these to the lender during the application process, so you’ll want to make sure you have them ready and that they are accurate.
  • Do you have the revenue needed to pay back the loan? In addition to the lender’s evaluation of your revenue, you need to be confident yourself that you’ll have the money to pay back the loan quickly.
  • What is your company’s credit history? A strong and extensive credit history will make it easier to qualify for a loan. Minimal credit history means your personal credit will be more important. A negative credit history will make it harder to qualify.
  • What is your personal credit history? Even with minimal business credit history, you can often qualify for a short-term business loan if your personal credit history is strong.
  • Do you have other loans or obligations? Your credit utilization is the amount of debt you currently have compared to the amount of credit you have available to you, and a low credit utilization rate is one of the big keys to a good credit score. Loans and other financial obligations can not only hurt your credit score, but they can make you more risky in the lender’s eyes because you have multiple debts to pay back.
  • Do you have a relationship with any particular bank? A strong and extensive history with a particular bank might make it easier to borrow money on preferable terms.
  • Do you qualify for any government loans? The government offers lending programs to companies in specific situations. If you qualify, you may be able to borrow on more favorable terms than you would through private lenders.

How to determine what type of business loan you need

Finding the right short-term business loan for your needs requires some work on your part. Your job is first to understand your need, and second to find the loan that matches that need at the lowest cost possible.

Here’s a step-by-step process you can follow:

  1. Figure out how much money you need – You don’t want to borrow more than you need, but you also don’t want to come up short. In addition, the amount of money you need will affect the lender you choose, as different lenders have different maximum loan amounts.
  2. Determine when you need the money – Do you need it right away or can you afford to wait? The more time you have, the more options you’ll have available to you, as some of the loans with better terms require a longer application process.
  3. Determine when you’ll be able to pay back the loan – When will you have the revenue to pay back the loan? This will help determine how long your loan term needs to be.
  4. Can you afford to make daily or weekly payments? Short-term loans often require daily or weekly payments, so you need to make sure you’ll be able to make them.
  5. Check your business credit history – Business credit scores range from 0 to 100, with the SBA noting that 75 or above is the ideal range. You can research your business’s credit history through Experian and Dun & Bradstreet.
  6. Check your personal credit history – You can pull your credit history for free once per year from annualcreditreport.com. And you can use this guide to get a sense for your credit score. A stronger credit history and higher credit score will lead to better loans.
  7. Prepare your financial reports – You should have well-organized bank statements, a profit and loss statement, and a balance sheet ready to provide during the application process. If you haven’t been keeping your books up to date, you might want to obtain the help of a CPA to make sure everything is done correctly.
  8. Evaluate alternatives to a short-term loan – There are alternatives to taking out a short-term loan, such as taking out a line of credit or utilizing a small business credit card. Make sure that a loan is truly the best option before proceeding.
  9. Reach out to the bank you already do business with – The bank you already work with may be your best bet for favorable terms, especially if you’ve had a long and positive relationship. Reach out to them first to see what they’re able to offer.
  10. Research local credit unions – Credit unions are member-owned and therefore often offer better deals than the big banks. Search for credit unions in your area and reach out to see what types of loans they offer and whether you qualify for membership.
  11. Apply with online lenders – Online lenders often offer shorter applications, quicker approvals, and better user experiences, but those benefits often come at the cost of higher interest rates. If you need money quickly, or if your credit isn’t ideal, these may be your best option. Either way, it’s worth applying to see what you qualify for. To compare offers for small business loans from various lenders, check out MagnifyMoney parent company LendingTree.com’s small business offer tool. 
  12. Compare the offers you received – Once you’ve shopped around, you can compare the loan offers you’ve received both to each other and to your borrowing needs. You should compare them along variables like the amount of money being offered, the interest rate, the frequency and amount of payments required, and the overall length of the loan, along with any other terms and conditions each loan comes with.
  13. Make a final decision – At this point you should be ready to make a final decision. And remember, not taking out a loan is still an option at this point, especially if none of the offers were exactly what you were looking for.

Alternatives to a short-term business loan

While a short-term business loan can be invaluable in the right situations, it isn’t your only option when it comes to financing your needs. Here are a few more to consider:

  • Future revenue – If you can afford to wait and you expect revenue to be coming in soon, you may be better using that future revenue to finance your project yourself. There’s no application process and no interest to pay.
  • Line of credit – As discussed above, a line of credit is a good option when you’re unsure how much money you’ll need and when you need it. You can secure the line of credit and simply borrow the money as needed, with the likely trade-off of borrowing at a higher interest rate.
  • Business credit card – There are a number of small business credit cards available, some of which provide a promotional period with 0% interest. If your borrowing needs are relatively small and you can qualify for these cards, you may be able to borrow the money cost-free.
  • Personal line of credit – If you can’t qualify for a business line of credit, you still may be able to qualify for a personal line of credit. Derus warns against this option, though, since it blurs the line between you and your business, which can lead to you being personally liable for your business’s obligations. And she warns about following all relevant tax laws, such as calculating imputed interest, when using personal money in your business that you plan to pay back to yourself.

The post Where to Find the Best Short-Term Business Loans in 2017 appeared first on MagnifyMoney.

The Ultimate Guide to Secured Business Loans

Opening or expanding a small business usually involves a significant financial investment, whether it’s paying for building renovations, computers or additional inventory. For new business owners with ambitious plans, this type of investment often requires more capital than they have on hand, and existing businesses may not have enough cash available to grow while continuing to pay regular operating expenses.

One common solution is a business loan, which can be secured from banks or other private lenders for more favorable terms and lower interest rates than unsecured loans.

In this guide, we’ll cover:

Part I: Understanding Secured Business Loans

USBL Table

Business loans typically are secured or unsecured, and the type of loan that you can qualify for will depend on market conditions, your credit score, your assets and your business’s profitability and outlook.

Secured business loans require collateral – as much as 80 percent or more of the loan’s value, which shows that the borrowers can repay the loan if the business fails or the loan goes into default. That means that business owners need to show the lender that they are willing to take on significant risk, including the possibility of losing their house or business assets, to secure financing for their business venture.

Unsecured loans do not require collateral and typically are easier to qualify for. For secured business loans, on the other hand, lenders look for applicants who are in a position to pay the loan back regardless of the business’s success and are willing to risk their own assets for the business. Applicants also need to have good credit and businesses that are feasible in the current market.

“That’s why [lenders] want people to have a proven track record of doing things responsibly,” says Roman Starns, a business consultant with the Louisiana Small Business Development Center. “[Borrowers are saying,] ‘look, I’m willing to put my home equity in, I’m willing to pledge some real estate, I’m willing to put 20 percent down in cash to make this business work.’

“That’s going to mean they are more likely to run that business well and do well at it. If someone puts nothing into it, they have nothing to lose but their credit.”

Lenders also will investigate whether the business is viable in the current market. An entrepreneur who wants to open, for example, a VHS repair shop could have a solid business plan and financial backing, but lenders likely will reject the application.

“They are going to look at the market conditions for this loan as well,” says Starns, who has 20 years’ experience as an entrepreneur and small business owner. “No one has VHS anymore. They want to see that this is a workable business and the financial projections on it show that, within reason, you’re going to be able to pay back everything and the business is going to make it. It’s not as easy as, ‘Oh, I have a great idea that’s going to work,’ and you go get a loan for the money.”

Part II: Types of Business Loans

Traditional lending institutions, such as banks, offer standard secure business loans through a simple application process. Borrowers can apply in person or online, and bank professionals will work with the borrower on the terms and amount of the loan. For applicants and businesses in good financial shape, this process can be quick and easy.

The type of business loan a borrower applies for will depend on their need for cash, financial situation and availability of collateral. Here are some options for business owners considering secured business loans.

Term loans

Term loans are best for business owners who have a specific, one-time need for cash, such as buying an expensive piece of equipment or financing a major building renovation. A term loan will provide the money up front in a lump sum, and the borrower pays it back over time. These loans typically are approved for established businesses that need extra cash to expand or enhance their services.

The length of the repayment period will depend on the purpose of the loan and the amount of collateral the borrower can offer. Until recently, term loans were offered between two and five years, but now they can be repaid in as little time as six months or as long as 25 years.

Deciding which type of term loan you need depends a lot on how soon are prepared to repay the loan.

Up to 2 years: Short-term loans

Short-term loans, which are best for paying for a pressing business need, must be paid back quickly. Terms might require daily or weekly payments, which allow the borrower to pay back the money quickly and minimize financing costs.

2 to 5 years: Medium-term loans

Medium-term loans are ideal for companies that are growing and are optimistic about their future. These loans, which usually are repaid in two to five years, allow business owners to put plans for expansion into action immediately rather than waiting to save enough money to buy equipment or other assets that will allow the business to grow. Medium-term loans can be unsecured or secured, and approval is based on the applicant’s credit score and collateral, if required.

10-25 years: Long-term loans

Long-term loans are designed for businesses that can project growth years. The amount of these loans, which have repayment terms ranging from 10 to 25 years, is dependent on the need, and they can range from several thousand dollars for a small equipment purchase up to $1 million for buying a building or property.

SBA-guaranteed loans

It is a common misconception that the Small Business Administration, a government agency that provides assistance to small businesses, loans money to businesses. Instead of making loans directly, the SBA creates guidelines for loans and then guarantees to its lending partners that their loans will be repaid.

The SBA works with several different kinds of institutions, including traditional lenders, microlending institutions and community development organizations. When a business applies for an SBA loan through one of these partners, the partner provides a loan that is structured according to SBA rules and is guaranteed by the SBA.

Because the SBA is a government organization, its rules and practices can change as government fiscal policies adapt to the current economy. It’s important to always check with the SBA for its most current policies and loan programs.

The SBA typically will not offer loans to businesses that can secure financing on their own, and it does not offer grants to new or expanding businesses. It does provide several programs to help borrowers finance different aspects of a business.

  • General small business loans: These loans, called 7(a), are the SBA’s most common loan program and can be approved for up to $5 million, although the SBA states that the average 7(a) loan for fiscal year 2015 was about $371,000. These loans are assigned low interest rates, and the SBA will guarantee as much as 85 percent of the loan up to $150,000. Seventy-five percent of loans over $150,000 are guaranteed. The loans are generally available to small businesses that do business in the United States and have already used alternative funding sources, such as personal savings.
  • Microloans: Available for startups and business expansions, SBA microloans are provided through intermediary nonprofit community organizations for up to $50,000. The average microloan is $13,000, according to the SBA, and interest rates are between 8% and 13%. Business owners usually are required to pledge collateral and a personal guarantee.
  • Real estate and equipment loans: The CDC/504 program offers loans for buying land, improving property, constructing and improving buildings, and purchasing equipment and machinery. Successful applicants will have a feasible business plan, no available funding from other sources, good character, and business projections that show an ability to pay back the loan. Loan amounts are based on how the business will use the money and how closely the business’s plan meets the program’s goals.
  • Disaster loans: When businesses suffer losses due to a declared disaster and are in a declared disaster area, SBA low-interest disaster loans are available to replace or repair real estate, personal property, inventory, business assets, and equipment and machinery damaged in the disaster. Owners of businesses of all sizes can apply online, at designated disaster recovery centers, or by mail, and the loan can be repaid in monthly payments or a lump sum. Loans can be approved for up to $2 million.

Business line of credit

A business line of credit works much like a business credit card, allowing the business to access funds as needed and make minimum monthly payments to repay the borrowed money. Through this type of lending, business owners can set their own borrowing and repayment schedules, depending on their cash flow.

Lines of credit are appealing to businesses because they are easier to obtain than standard secured loans, and the business owner does not pay interest until they withdraw money from the credit line. This type of borrowing is best for established businesses with optimistic outlooks, as struggling businesses in danger of failing may leave the owner personally responsible for unpaid debt.

Chris Kline, co-owner of a pillow manufacturing business in Bucks County, Pa., says his business recently took out a $50,000 line of credit to buy more manufacturing equipment to meet increasing demand for their products. Kline and artist Eric Fausnacht opened the business manufacturing pillows printed with Fausnacht’s artwork five years ago, and Kline helped move the business from arts and crafts shows into the wholesale market.

The application process for a line of credit included a meeting with a bank official, who visited the company on-site and talked at length with the business owners about their company and business projections.

Kline, 45, says that he prefers to borrow conservatively, and he and Fausnacht pledged business assets rather than personal assets to secure the line of credit. While unsecured lines of credit are available for maximums under $100,000, secured lines of credit typically have lower interest rates and higher credit lines.

“I’m not looking to borrow more than 10 or 15 percent of annual sales,” Kline says. “And I’m confident we will be able to pay that back if something unforeseen happens.”

The new equipment purchased with the line of credit already increased production and revenues enough that Eric & Christopher now has eight or nine full-time employees and additional part-time staff.

Equipment loans

Many businesses require expensive equipment, such as an X-ray machine or a tractor, to get started. Without revenues from the business, a business owner may not have the capital to pay for the equipment. An equipment loan, which several types of lenders offer, can help a business buy the equipment it needs to begin or expand operations.

Unlike many other types of business loans, the equipment can serve as collateral for the loan and makes the loan easier to obtain. If the borrower can’t make the payments, the lender will repossess the equipment and sell it to recoup some of its losses. Applicants for equipment loans should have good credit and cash available for as much as a 20 percent down payment.

Equipment loans typically come with low interest rates and manageable payments, making them good tools to help businesses afford expensive purchases. Business owners must pay off the entire loan, even if the loan repayment term is longer than the life of the equipment.

Invoice financing (factoring)

Invoice financing, also called invoice factoring, is an easier way for an established business owner to raise capital than with a standard secured loan. This process allows business owners to sell their outstanding invoices at a discount to a third party, which then collects on them to repay a single-payment loan issued to the business owner.

These types of loans are beneficial for business owners who need cash faster than the repayment deadline on the invoices. Invoice financing can cover cash flow gaps and payroll, for example, and it is low risk because the money comes from completed sales rather than sales projections. The downside is that invoice financing requires substantial fees.

Inventory financing

Businesses that depend on a steady flow of inventory can use inventory financing to keep their shelves stocked or to buy more inventory for seasonal sales increases. Inventory financing also can help small businesses with cash flow during periods of slow sales.

Inventory financing provides a revolving line of credit that business owners can draw on as needed. The business owner pledges existing inventory as collateral for the loan.

Part III: How to Secure Your Business Loan

There are several ways to secure a business loan. You can use hard assets for collateral, like a house or a boat; paper assets, like investments and savings accounts; or your own inventory and invoices. We’ll dig into types of ways to secure your business loan here.

Securing your business loan with collateral

If you or your business has significant assets, you likely are a good candidate for a secured business loan. Lenders will consider the amount of collateral you have when deciding on your loan application, as they want to reduce their risk in case you can’t repay your loan. If you default, lenders will take possession of collateral and sell it to regain at least some of the money they lent you.

This is where risk can come in. While your business may be secure when you apply for the loan, downturns in the market or other unexpected events may push a business into hard times. For example, if an unsavory business moves in next door, your customer traffic may slow significantly. If a machine breaks down or needs to be replaced, production could be slowed and orders unfulfilled. Theft and natural disasters that destroy your business’s property also can severely reduce revenues and lead to unexpected expenses.

If unforeseen circumstances result in a business owner being unable to make loan payments, the lender can seize collateral. As a result, a business owner can lose their house, their car or their savings. If the collateral is property belonging to the business, seizure can be just as devastating, and losing significant business assets can cause the business to close.

The payoff for a secured loan, though, will be more flexible loan terms and significant financial savings over time. Borrowers with secured loans will pay lower interest rates and fewer fees, and they may not be penalized for paying off the loan early.

Hard vs. paper assets

Lenders typically will accept personal and business assets, which a business owner can pledge as collateral if they want to protect their personal property. Either way, borrowers must promise the lender something valuable that can easily convert to cash in the case of default to recoup losses.

Borrowers can pledge two types of collateral: hard assets and paper assets. Hard assets include houses, vehicles, boats and land, while paper assets include stocks, savings, investments, insurance policies and bonds. Lenders also will happily accept cash accounts as collateral, but they will not consider retirement accounts, such as 401(k) plans.

Business assets that qualify as collateral include inventory, insurance policies, accounts receivable, machinery and equipment, and unpaid invoices.

Some lenders may attach a blanket lien to a loan as collateral, and borrowers should be aware of the sweeping consequences this can have if the loan goes into default. Blanket liens give lenders a legal claim to all of your assets, business or personal, if you stop making loan payments.

Securing your business with a personal guarantee

In many cases, borrowers will be asked to provide a personal guarantee for a secured business loan. This requires the signatures of all principal owners, ensuring that they have assets they can put up as collateral. While the signatures are on unsecured promises, a personal guarantee does allow the lender to take signers’ assets if the loan is not paid. If you don’t have enough assets to personally guarantee a loan, business consultant Starns recommends finding a business partner who does.

Personal guarantees are different from collateral in that they give lenders access to a wide range of assets, while collateral typically specifies assets the lender can seize in case of nonpayment.

It’s important to know what you’re signing when offering a personal guarantee. If you do default on the loan, the lender may release you from the personal guarantee if you ask, and you also could try to arrange with the lender to first sell business assets to satisfy the outstanding debt before they seize your personal assets.

Part IV: Shopping for a Secured Business Loan

Borrowers can apply for secured business loans at several types of financial institutions. Banks and credit unions offer standard application procedures that include filling out an application in person or over the phone, discussing terms and the loan amount with a loan officer, and working with a business specialist to access funds if the loan is approved.

Business owners can apply for SBA loan programs through partner lenders, which can include banks and community organizations that work within SBA guidelines. Borrowers will need to download and complete an SBA loan application and be prepared to submit documents such as personal background and financial statements, business financial statements, and income tax returns. A list of SBA lenders is available on the agency’s website.

Online lenders typically have faster application processes and can get money to borrowers quickly, but they often come with higher interest rates than traditional lenders. Some online lenders often charge origination and monthly maintenance fees as well.

To compare offers from multiple business loan lenders, check out MagnifyMoney parent company LendingTree.com.

Do your research

Before business owners begin shopping for a secured business loan, financial advisers recommend realistically assessing their business’s economic situation. Secured business loans come with great personal risk, as a failed business and inability to pay off a secured loan can cost a business owner significant personal or business assets. Online calculators can help borrowers estimate potential monthly payments and make good decisions about what amount of loan they can afford.

Bob Burton, a retired businessman who now volunteers as a mentor for the Charlotte, N.C., office of SCORE, a national organization that provides mentoring and education to small business owners, says he makes sure that clients understand the economics of their idea for a business.

“They have to make the call whether they want to put their money in it,” Burton says. “A lot of people don’t understand what’s involved in starting a business. It sometimes can look very simple, but it can be quite complex.”

Starns advises borrowers to think through how realistic their plan is, including whether they are truly committed to the endeavor and have enough experience to execute it, before taking on a secured loan.

“You’re risking a lot of things,” he says. “Owning your own business is rewarding, but it’s also risky and takes a special mentality to be able to do it.”

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How to Find Your Best VA Business Loan Options in 2017

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Veteran-owned businesses make up just under 10 percent of all businesses in the U.S., according to a 2017 report by the Small Business Administration. Despite veterans’ propensity toward entrepreneurship, funding options for veteran-owned business can be difficult to find. According to the same report, nearly 60 percent of veterans’ startup or acquisition capital comes from personal or family savings, while less than 10 percent comes from loans from federal, state, or local government, government-backed business loans from banks, or business loans from banks or other financial institutions.

Obtaining startup financing is always a challenge, but veterans may have an especially difficult time. Because their housing, transportation, and many other daily necessities are handled by the military, they may not have built credit while actively serving.

Fortunately, many organizations, including the U.S. Department of Veterans Affairs (VA) and the U.S. Small Business Administration (SBA) have stepped up to provide resources for veteran entrepreneurs. In this guide, we’ll take a look at the options available for current veteran business owners and veterans looking to start their own business.

Traditional bank loans

Borrowers who bank with a financial institution that caters to military members should talk to a loan officer at their bank first.

Navy Federal Credit Union provides small business financing of up to $50,000 through a combination of term loans, business credit cards, vehicle loans, and business checking lines of credit. A four-page application is available on their website and can be submitted online.

Fort Knox Federal Credit Union, which is available to active duty military, reserve, National Guard, and civil service employees and retired military or civil service members, provides SBA-backed commercial real estate loans. You can request more information by filling out a Commercial Loan Request Form online.

Tammy Everts, a certified business adviser with the Spokane Small Business Development Center, says borrowers with a good credit score seeking a loan of less than $150,000 may be able to qualify for a loan based on their credit score alone. “Talk to your commercial banker where you already have a relationship,” Everts says. “If you’re denied there, then you can expand your search.”

SBA-guaranteed loans

Neither the VA nor the SBA loan money directly to veteran entrepreneurs, but the SBA does guarantee small business loans for veterans. This means that should the business default on the loan, the government will pay a portion of the remaining balance back to the lender. This guarantee encourages banks to lend to applicants that might otherwise be considered too great a risk.

Everts says veterans, unfortunately, have fewer options than they did a few years ago. Prior to 2013, the SBA offered the Patriot Express Loan targeted at helping veterans and active duty military with loans up to $500,000. That program ended, but Everts says it was rolled into the SBA Express Program under the name SBA Veterans Advantage

To qualify, the business must be owned and controlled (51 percent or greater) by a veteran.

The SBA defines a veteran as:

  • Veterans (not those dishonorably discharged)
  • Active-duty military participating in the Transition Assistance Program (TAP)
  • Reservists and National Guard members
  • Current spouses of any veterans, active duty service members, reservists, or National Guard members and widowed spouses of any service members who die while in service or of a service-connected disability.

To document eligibility, the borrower must provide a copy of Form DD 214 or other documentation as outlined in SBA Information Notice 5000-1390. Eligible veterans have four options under the Veterans Advantage Program:

SBA Express loans of $150,001 to $350,000

  • No upfront fees
  • Two-page application and response within 36 hours
  • The SBA guarantees 50 percent of the amount borrowed

SBA 7(a) loans $150,000 and under

  • No upfront fees through 9/30/17 (typically 1.5 percent of the guaranteed portion)
  • Terms up to 10 years for equipment and up to 25 years for real estate
  • The SBA guarantees 85 percent of the amount borrowed

Non-SBA Express loans $150,001 to $500,000

  • The upfront fee is 50 percent less than the fee charged to non-veteran owned small businesses as follows:
    • Loans with terms greater than 12 months: fee is 1.5 percent of the guaranteed portion
    • Loans with terms of 12 months or less: fee is 0.125 percent of the guaranteed portion

Loans of $500,001 to $5 million

  • For loans of $500,001 to $700,000, upfront fee is 3 percent of the guaranteed portion
  • For loans of $700,001 to $5 million, upfront fee is 3.5 percent of the guaranteed portion up to $1 million, plus 3.75 percent of the guaranteed portion over $1 million

Note that for all but the Express Loan, the reduced fees are applicable only for loans made until September 30, 2017. The fee waiver has been extended in the past, but there is no guarantee it will be extended again.

Interest rates on all SBA loans are negotiated between the lender and the borrower.

How to apply

To apply for an SBA-backed loan, borrowers can use the Lender Match tool available on the SBA’s website. Everts says qualifying for an SBA Veterans Advantage loan isn’t really different from other bank loans. “The bank will expect a 15 percent cash contribution from the business owner and a good credit score,” Everts says. “With a credit score over 700, the borrower may be able to get a loan with very little paperwork.

Nonprofit lenders

Nonprofit lenders can often provide small business funding when traditional banks won’t.

CDC Small Business Financing VetLoan Advantage

CDC Small Business Financing’s VetLoan Advantage Program is available to veterans looking to purchase commercial or industrial buildings and equipment.

The VetLoan Advantage loans are backed by the SBA, but they offer lower down payments (typically 10 percent). Mike Owen, Chief Credit Officer and Director of Business Development for CDC Small Business Finance, says CDC provides a cash rebate of up to $3,000 to help veterans offset loan expenses. Borrowers can prequalify for a loan online.

The Jonas Project

The Jonas Project provides startup funding, training, and mentorship for veteran women. To qualify, applicants must be a U.S. military veteran with honorable discharge verification, demonstrate knowledge or skill in their desired field of business, and pass an extensive interview and qualification process. Applications are available online.

Veterans Business Fund

Veterans Business Fund (VBF) was established to assist veterans by providing them with the supplemental capital required to satisfy the equity requirements for a small business loan. VBF loans are non-interest bearing.

Currently, the VBF is not accepting applications until their necessary fundraising is complete, but borrowers should check back in the future to find out more about the application process and requirements.

Microloans

If your borrowing needs are modest, a microloan may be the way to go. Microloans typically range from $500 to $100,000, although the definition of a microloan varies by lender.

Kabbage, a microlender that has provided over $3 billion in funding to more than 100,000 businesses, has a microloan program designed specifically for veteran-owned businesses. Borrowers can apply online or through the Kabbage mobile app for a line of credit up to $150,000.

Angel investment groups

Angel investors are affluent individuals who provide capital for a business startup, usually in exchange for ownership equity in the business. Some angel investors organize themselves into angel investment groups to share research, pool their investment capital, and provide advice to their portfolio companies.

Hivers and Strivers is a Great Falls, Va.-based angel investment group that focuses on investing and supporting startups founded and run by graduates of U.S. military academies. The group concentrates on investing $250,000 to $1 million in a single round, although they can work with other investment groups when larger financing rounds are needed.

Their investors, most of whom have also served in the military and have a broad range of experience in different industries and business models, will also serve as board members and advisers to the businesses they finance. Borrowers can submit their idea for consideration online.

Online lenders

Online lending platforms (sometimes referred to as peer-to-peer lending) are online services that match lenders with borrowers. Because they typically run with lower overhead, they often provide loans with better terms than traditional financial institutions.

StreetShares is an online lending platform that focuses on connecting veteran-owned and -run businesses with investors. They offer three different funding solutions:

Term loans

  • Loan amounts from $2,000 to $100,000
  • Terms of three to 36 months

Patriot Express line of credit

  • Lines of credit from $5,000 to $100,000
  • Terms of three to 36 months

Contract financing

  • Based on future earnings
  • No limit on contract amount

StreetShares only loans to borrowers who have been in business for at least one year and have “reasonable” credit. Borrowers can get pre-approved in minutes, and there is no application fee.

Grants

Grants are attractive to entrepreneurs without a lot of cash available to start or grow a business because, unlike a loan, the funds do not have to be repaid.

StreetShares Foundation

The StreetShares Foundation awards $10,000 in business grants to veterans and military spouses each month. Applicants must be a veteran, reserve, or active duty member of the U.S. armed forces or a spouse of a military member or veteran. Selection criteria are based on the business idea, use of funds and potential impact, product-market fit, team and company history, and influence of the business on the military and veterans community.

Applicants must qualify for the award by downloading or viewing educational materials, then complete an online application that includes writing a 300-word summary of the business and submitting a short video about the project or company.

USDA Outreach and Assistance for Socially Disadvantaged Farmers and Ranchers and Veteran Farmers and Ranchers Program (a.k.a The 2501 Program)

The U.S. Department of Agriculture provides small business grants, education, training, outreach, and other forms of support to veterans and minorities looking to begin or expand agricultural operations. Funding opportunities are closed for 2017.

Veterans can also search for additional grant opportunities through grants.gov; however, Everts says her office typically counsels people to bootstrap their business because the process of searching and applying for grants can take a significant amount of time.

Other small business financing options for veterans

While funding is important, it’s often not the only resource veterans need to successfully start or grow a business. Here’s a look at some other great resources:

Boots to business

The Boots to Business entrepreneurial program is offered by the SBA. The curriculum includes a two-day classroom course on entrepreneurship as well as an eight-week online course with in-depth instruction on preparing a business plan and starting a business.

At the end of the eight-week online course, participants will have the tools and knowledge they need to identify business opportunities, draft a business plan, and launch a small business.

Veteran’s Business Outreach Center

Also funded by the SBA, Veteran’s Business Outreach Centers are a resource for service members, veterans, and military spouses looking to start, purchase, or grow a business. Centers are located in 17 states.

Business counselors at the outreach centers provide mentorship and work with veteran entrepreneurs on business plans, feasibility analysis, and provide training on franchising, marketing, accounting, and more.

Syracuse University Institute for Veterans and Military Families

The Institute for Veterans and Military Families hosts conferences and provides training for veterans transitioning to civilian life. Their initiatives include:

Entrepreneurship Bootcamp for Veterans with Disabilities

Available to post-9/11 veterans with a service-connected disability. The boot camps feature a 30-day online program, nine days of live training, and 12 months of post-program support.

Bootcamp for Veterans Families

Available to military families who serve in a caregiver role to a veteran with a service-connected disability. The boot camps feature a 30-day online program, nine days of live training, and 12 months of post-program support.

Veteran Women Igniting the Spirit of Entrepreneurship

Women veterans and female military spouses can receive entrepreneurship and small business management training through Veteran Women Igniting the Spirit of Entrepreneurship. This three-phase program includes a 15-day online course, a three-day entrepreneurship training event, ongoing mentorship, training, and support opportunities for graduates launching or growing a business.

There is a one-time $75 registration fee for the program, but the SBA covers a two-night hotel stay for event attendees and all meals and educational materials during the conference. Veterans can view the program calendar and apply online.

VetFran

The International Franchise Association created VetFran, a strategic initiative to teach veterans about becoming a franchise business owner. Veterans and their spouses can get help figuring out whether franchising is right for them and search a directory of franchises, many of which offer discounts or grant free franchises to veterans.

American Corporate Partners

American Corporate Partners connects post-9/11 veterans to corporate mentors from companies such as Deloitte, Morgan Stanley, AT&T, Coca-Cola, and Intel for year-long, one-on-one corporate mentoring. Mentors help veterans with small business development, professional communication and leadership skills, and career development.

The program is open to service members, veterans, and spouses who meet the following eligibility criteria:

  • Currently serving and recently separated veterans who have served on active duty orders for at least 180 days since 9/11.
  • Surviving spouses and spouses of severely wounded post-9/11 veterans.
  • Service members who served less than 180 days of active duty since 9/11, but who were injured while serving or training.

Applications can be completed online.

SCORE Veteran Fast Launch Initiative

SCORE (previously known as the Service Corps of Retired Executives) is a nonprofit association of thousands of volunteer business counselors throughout the U.S. Their Veteran Fast Launch Initiative provides mentoring and training to veterans transitioning to entrepreneurs. The program is a package of free software combined with mentoring aimed at helping veterans and their families start and succeed as small business owners.

In addition to templates and tools to help veterans plan and operate their businesses, veterans also receive five hours of free financial advice from a CPA.

National Veteran-Owned Business Association

The National Veteran-Owned Business Association (NaVOBA) doesn’t provide funding for veteran-owned small businesses, but it does provide networking opportunities for veteran entrepreneurs, encourages the federal government to spend their contract dollars with veteran-owned businesses, and advocates with state governments to pass laws creating opportunities for veteran-owned businesses.

The Bunker

The Bunker is an incubator for veteran-owned technology startups. They have local chapters throughout the U.S. that provide educational programming, resources, and networking for military veterans and their spouses interested in starting and growing a business. Their EPIC Entrepreneurial Program is a 12-week course designed to help participants launch a business.

The exact information you’ll need and qualifications to be approved for a loan depends on the funding option you’re interest in and the bank you’re working with. Some have simple applications and quick approval processes. Others will want to see collateral, business plans, personal financial statements, bank statements, and credit scores. Whatever funding opportunity you pursue, Everts recommends taking some time to prepare before applying. “Get your numbers in a row and know how much you can contribute to the business,” she says.

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How to Get Approved for a Small Business Loan

Getting a loan to start or grow a small business is rarely easy, especially since the financial crash of 2008 and the credit crunch that followed. Finding the right lender and navigating the application and underwriting process is challenging. So being adequately prepared and taking practical steps to improve your chances ahead of time can help reduce the amount of time you’ll spend and reduce your frustration with the process. With that in mind, here are four tips for getting approved for a small business loan.

Know your business credit score AND personal credit score

Gerri Detweiler, Education Director for Nav, a platform that connects small business owners to financing, says that the first thing any small business owner should do before applying for a small business loan is check their business and personal credit score. “Some lenders may review one or the other, and some review both,” Detweiler says.

How to find your business credit score:

Your business credit score is based on trade credit (when a supplier allows you to buy now and pay later) and other debt in the business name, such as credit cards and equipment loans. Business credit is measured on a scale of 0-100, with a score of 75 or more being the ideal range. Both Experian and Dun & Bradstreet calculate business credit scores.

If your business is very new or hasn’t used credit in the past, you may not have a business credit score. In that case, Detweiler says, your personal credit score will probably play a larger role in getting the loan approved. Most lenders look for a personal credit score of 640-660 or higher.

How to find your personal credit score:

 

Find the right type of lender for a small business loan

Traditional banks may be the first option that comes to mind when you think about a small business loan, but Detweiler says most banks don’t make startup loans. Even existing businesses may have a hard time getting a bank loan of less than $50,000, depending on the lender.

Your first step should be talking to the bank or credit union that holds your business checking and savings accounts. They may be able to offer a term loan or line of credit. They may also be able to help you with a loan backed by the U.S. Small Business Administration (SBA). The SBA’s 7(a) Loan Program is designed to help small and startup businesses with financing for a variety of purposes.

Nonprofit small business loans

If a traditional or SBA loan is not an option, you might consider a nonprofit microlender. These loans are a bit easier for startups to qualify for. Their standards are less stringent because profit is not the lender’s objective. They often focus on helping disadvantaged communities or minority business owners. According to the Aspen Institute’s FIELD program, the top U.S. microlenders are:

  • Grameen America – helps women in poor communities build businesses
  • LiftFund – offers microloans in Texas, Louisiana, Mississippi, Alabama, Arkansas, Missouri, Kentucky, and Tennessee
  • Opportunity Fund – provides loans to low-income residents of California
  • Accion – offers loans from $5,000 to $50,000 throughout the U.S.
  • Justine Petersen – provides loans under $10,000 to entrepreneurs who don’t have access to commercial or conventional loans

Get your financial statements in order

Whether you apply for a loan through a bank, credit union, or non-bank lender and whether you rely on your business or personal credit, anyone who lends money is going to want financial statements.

Getting your financial statements in shape before applying for a loan will increase your chances of approval and help you qualify for more competitive rates. For your business, these are the key documents a lender will want to look at:

  • Profit and Loss (P&L) Statements
  • Balance Sheets
  • Statement of Cash Flows for the past three years

Providing financial statements can be a significant hurdle for small business owners and startups who’ve neglected their bookkeeping. If you’ve been cobbling together the books on your own, you probably haven’t been preparing your business financials in a recognized basis of accounting such as Generally Accepted Accounting Principles (GAAP). You may need to hire an accountant to get your business books in order and prepare the financials. This can be costly, so find out what your lender requires before you get started.

The lender may also want to look at a personal financial statement:

  • Your assets
  • Liabilities (debts) and contingent liabilities (such as a co-signed loan or outstanding lawsuits)
  • Income

You can download a Personal Financial Statement form from the SBA website for an indication of the information you’ll be required to submit, but banks often require their own form.

Run your own background check on Google

Gil Rosenthal, director of risk operations at BlueVine, a provider of small business financing, says lenders will often Google loan applicants and check social media profiles to see what others are saying about the business and its owners.

Loan underwriters are looking to see whether you are considered a trusted authority online, whether you’re using social media to promote your brand, and whether you quickly and effectively respond to customers. Be cognizant of your online reputation, including Yelp reviews, and keep your business and personal social media profiles up to date.

If your online reviews are less than glowing, Rosenthal says, “you can mitigate the impact by being prepared to explain anything negative that comes up in the application process.”

The bottom line

Even if you have all of your proverbial ducks in a row, finding the right terms from the right lender may take some time. By anticipating what your lender will review and require, you’ll greatly increase your chances of getting approved for a small business loan.

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