Small Business Loan 101

From Naurys Marte

Essentials of Small Business Loan

As a small business owner, your most difficult task is finding the money to operate your business. Taking the necessary steps to prepare for a small business loan can minimize the difficulty. Learn what you need to know to clinch the loan deal.

Banks and other lending institutions cite risk factors as their main reason for turning down small business loan requests from startup businesses. Yet, you can still get a loan for your business by proper preparation.

Avoid the common error of thinking you can start with grants from the government and community agencies. It is even more unlikely than getting the money from your own savings, family, friends, or a bank.

The main requirements of attaining a small business loan are your personal credit history, business plan, experience, education, and feasibility of the business you are starting or expanding.

The most important task to obtain a small business loan is preparing a business plan.

The business plan needs to show the lender that providing you with a small business loan is a low-risk proposition. Your business plan must answer the questions a lending institution would ask. These questions usually are:

How much money do you need?

If you are starting a business, this should be included at least in the start-up capital estimate. Accuracy is important, so request enough money to invest wisely.

What are you going to do with the money?

You will have to provide, in detail, the designated use of every dollar requested. A small business loan is often needed for: operations (new employees, marketing, etc.), assets (equipment, real estate, etc.), or to pay off business debts.

When will you repay the small business loan?

Explain in detail how this small business loan will serve as a stepping-stone for your business. You will need to convince the lender (with your financial statements and cash flow projections) that you are able to repay the loan through the expected long-term profitability of your business.

What will you do if you don't get the loan?

Let lenders know that rejection will not discourage you from starting or growing your business. You want to portray a confident and determined personality and you will try lender after lender until you receive the money you need to get your business moving.

As a small business owner, you will need a certain degree of fortitude. Be confident and proud of your venture. Let lenders know you are in control and know what's best for you and your business. Understand that lending institutions need to make loans. But if you don't get one, don't get discouraged. Ask the lender why you didn't get the small business loan. Learn from the answer, move on, and try other lenders.

Getting The Money You Need To Buy A Business
If you’re thinking about buying a business, you’ll be pleased to learn that financing the purchase is generally quite easy. In fact, it’s far simpler to get the money you need to buy an existing business than it is for a start up. Most people simply don’t realize how to do it. Don’t get the wrong idea: you’re not going to buy a business, at least a good one, with no money down; that only happens in the infomercials. Many prospective business buyers mistakenly believe that traditional lenders will welcome them with open arms when they present them with a business they’re looking to acquire. Unfortunately, nothing can be farther from the truth. It still amazes me how the banks have got most people fooled. They run these great ad campaigns promoting themselves as “business/client friendly” but try to get them to lend you money to buy a business. It won’t happen. It doesn’t matter how experienced you are, or what your relationship is with them,. Unless you’re prepared to collateralize the loan 100% with non-business and personal liquid assets, they aren’t going to give you a penny. So don’t waste your time seeing them. With the terms they offer, it’s just not worth it. The landscape is pretty lopsided when it comes to how people buy small businesses. 90% of all transactions involve some financing. Only 10% are all cash deals. Even if you’re inclined to pay all cash, my advice is not to do so, unless you get a very hefty price reduction: at least 20%. Seller Financing The vast majority of small business acquisitions involve seller financing. In fact, it’s estimated that over 80% include some for of financial aid from the former owner. While the percentages vary, it’s generally 30% to 50% of the total purchase price. When you think about the situation, it makes perfect sense. First of all, by providing financing, the seller validates the viability of the business itself. Also, the seller is able to get the highest price possible by funding part of the acquisition. From a buyer’s perspective, it serves to reinforce that the seller is also at risk in the transaction. It’s a perfect mechanism to help ensure that what you’ve been told by the seller is true and accurate. It also serves as a mechanism to deal with situations that may arise later on that come about as a result of their actions where you may need the ability to offset their financing. While the terms vary for seller financing, you can expect to pay about 6-8% over four to five years. Plus, you have the ability to get far more creative with seller financing than any other: Negotiate a holiday from any payments for three-six months after closing   Allow for the first year to be all principal   Have the right to make lump sum payments several times a year towards the principal   No prepayment penalty   You can arrange for lower payments throughout the loan with a balloon payment down the road   While you will have to sign personally, you will not have to personally collateralize the loan. The seller’s lien is against the assets of the business. SBA Financing The Small Business Administration does NOT lend money for people to buy businesses. The SBA guarantees loans made by lenders (up to a certain amount) for small business acquisitions. There are both good and bad points to an SBA loan.  The good news is that there is money available; up to $1,300,000 plus additional funding should it include real estate.  The terms for repayment are favorable-up to 10 years and greater when real estate is involved q When a business passes the SBA qualifications, you can be fairly confident that it is a solid business   If you do not have at least 25% equity in your home, you may not have to fully collateralize the loan.  Typically, they will finance 70-80% of the deal. You may be thinking, if you can make the acquisition with 20% down, why would you even think about anything else? Here’s why:  Most small businesses won’t pass the SBA requirements q The financial review is based upon the weakest of the past two or three year’s tax returns   You must have demonstrative experience in a business that is similar to the one you are considering   The will want your house, life insurance policy (possibly) and your first-born as collateral.  It can take up to 90 days to complete the entire process. Having said this, it is nevertheless advisable for you to explore the SBA option. You’ll want to approach a “preferred SBA lender”. Most banks have this status. What it allows for is the banks to approve the loan on their own without having to submit everything to the SBA. If you choose this route be VERY specific in asking the lender for timelines to complete the transaction. So What’s Your Best Bet? Unless you’re buying a business for under $100,000 or getting an enormous price concession, don’t pay cash. As for SBA approval, while their rigid guidelines will help to confirm the viability of a business, unless you’re making an acquisition where you cannot finance the down payment, I tend to place this as my second choice. I am a huge believer in seller financing. It’s like buying a used car with an extended warranty paid for by the prior owner. There’s no substitute for the flexibility you can achieve, or the favorable terms, plus, more than anything else, it really forces the seller to share in the risk. If I’m going to buy someone else’s business, I want to be darn sure that they’ve got a stake (or risk) in my success as well. Copyright 2001 – 2007 by Diomo Corporation Richard Parker. All rights reserved.