How to Get A Bank Small Business Loan
Here at Ventury Capital we get 1000’s of inquiries monthly from business owners looking for loans, and many don’t understand what options are available to them.
Business owners who have shopped for a loan often are bombarded by the daily payment merchant lenders.
While that loan has a place in today’s market, it’s not for everyone and there are more traditional options available.
The first stop for any business owner who is looking for a loan is usually their branch bank, and that’s not a bad idea.
What you need to understand is each bank has its own signature products.
The guidelines for these are very strict so a very small percentage of business owners can qualify for them. If you can’t qualify for a signature product the bank will put you into the SBA process.
In case you are not aware when a bank extends an SBA loan they are only responsible for 15% – 25% of the loan if it defaults.
This puts them in a low risk situation which is why it’s the go to product for your traditional branch banks.Click Here To Get The Step by Step Guide on Getting A Small Business Loan
As of April 2015 alternative lenders such as Ventury Capital are now originating more SBA loans than the banks are.
If you look at the data put out by the SBA you see that only 21% of SBA’s were originated by small banks, 43% by credit unions, 49% by small banks, and 61% by alternative lenders.
Don’t believe that just because they are your
branch bank they are the best at what they do.
Now SBA loans do ask for higher profit margins than a traditional loans originated by an investor, so they are not for everyone. Frequently I have clients who don’t meet the guidelines for SBA but we are still able to place them into the same monthly payment, simple interest loan but our approval rates are much higher because guidelines are more liberal in the investor market.
As a consumer you always want to speak with someone who has several options as opposed to one or two.
Every business is different, and every business’s gross and net sales are different so it’s important to find someone who understands your financials, and then places you in the correct product so your time is not wasted.
Here are some key points to understand when approaching a lending institution for a traditional term loan.
Have you been in business for at least 2 years and do you have your books in order.
The minimum guideline for a simple interest business loan with monthly payments is 2 years in business.
However, many times it’s difficult to qualify a company until they have been in business for 3 years.
The reason is until you hit that 3 year mark you really don’t have 2 full years of tax returns to show consistency in gross and net profit. This doesn’t mean you shouldn’t try because compensating factors like high profit margins, solid balance sheet, and high debt service (low business debt ratio) can push these approvals through even when you have only been around 2 years.
Debt Service Coverage
In the business world you will hear terms such as EBITDA and debt service, these are ratios banks and lenders use to test the ability of a business to qualify for a more traditional loan product.
Debt service is the main focal point, and here are some examples of what lenders look for:
1. A debt service coverage is a ratio that shows your profit compared to your expenses.
A debt service of a 1.00 means that for every $1 your business earns you also spend $1, a debt service of a 1.10 means that for every $2 your company earns you spend $1, and a debt service of a 1.20 means that for every $3 your company earns you spend $1.
These numbers are important because a branch bank and SBA wants to see the debt service at a minimum of a 1.20 – 1.25 and this can be difficult for new businesses because they do write off quite a bit.
So when you look at your bottom line on your business tax returns it’s very difficult to show a profit of 20% – 25% after deductions.
Now, there are other items like officer pay which can be added back into the “net operating income” which can help this bottom line number. The “net operating income” is your gross sales minus deductions and this is the number from which the IRS taxes your business.
The great thing about working with someone like Ventury Capital is that we can take you SBA but if you don’t meet the very high debt service requirement we have investors that will fund your business loan at debt service ratios as low as 1.00, typically we want to see a 1.10 but if you have compensating factors such as 5+ years in business, good personal credit, and good business credit we are able to use these as leverage to get you approved.
It’s important that the person you are working with can look at a business that has been around for 10 years and extend a loan not just on ratios alone, but based on the fact the owner is a survivor and longevity means a lot to someone looking to lend money.
Your financials are a key component to getting approved for more traditional loans and this is what underwriting uses to decide if you qualify.
Typically you will need the following items to qualify for traditional simple interest business loans:
Investor Term Loans:
- Last 3 years of business tax returns
- Most recent 6 months of business bank statements
- 1 year of personal tax returns
SBA Term Loans:
- Last 3 years business tax returns
- Last 3 years personal tax returns
- Most recent 6 months of business bank statements
- Year to date P&L and Balance sheet
As you can see the SBA looks at a much deeper picture of your business and personal financial situation.
Credit is a key factor in traditional term installment business loans.
If your credit is below 650 it’s going to be difficult to get a bank small business loan. Since your FICO score is a record of your ability to repay debt, anything less than 650 suggest there have been issues in the past with repayment.
To read more about how personal credit affects business financing you can go here: http://venturycapital.com/how-does-personal-credit-affect-business-credit-and-financing/
How quickly do you need the money?
What you need to understand about SBA business loans is that they can take a month to 4 months to process and fund.
The express program with SBA has a maximum loan amount of $350,000 but the time from submission to funding is usually 6 weeks. Now we typically haven’t seen approvals over $150,000.
The standard SBA program which extends loan amount over $150,000 up to $10,000,000 or more usually take 4-6 months and can be exhausting to a business owner. If you don’t have that kind of time to wait you will need an alternative.
At Ventury Capital we have investor term loan products which only take 5 – 7 business days from submission to funding.
Couple that with the more lenient guidelines, and the loan becomes very desirable to many business owners who are in the market for this type of loan.
Look, SBA rates are around 6.375% on the express and standard programs where as investor term loans could range from 8% – 15% depending on the risk factors.
BUT, if you need to move quickly and want more assurance that you won’t come out of a long term process with a declined file you might want to look at alternatives the next time your business needs a bank small business loan.