The Step By Step Guide On Getting A Small Business Loan

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The Step-by-Step Guide On
Getting A Small Business Loan

Every business owner, regardless of how much money is in the bank, would access more capital if they could. That’s because good business owners understand that money… and having the ability to access it, is the key to growth.

The only trouble is, it can be difficult to get a small business loan, and no one wants to go through the headaches associated with traditional lending. From the credit check, to the business plan, the financials, and everything in between, getting a small business loan is not easy for the average business owner to achieve. 

If you’re looking to get a small business loan, then this article is for you.

It’s important to know a few things about lending.

1. Traditional banks average loan was $337,000.
2. Traditional banks average “turn time” was no less than 4 months
3. Traditional banks average rate was 6.25%

You should know when I use the term “traditional bank” I’m referring to retail banks that you are probably aware of: Bank of America, Wells Fargo, JP Morgan Chase, etc.

The reason why we speak about traditional lending is because this is where the majority of SBA notes are originated

Before we go into a step by step guide on getting a small business loan, it’s important for you, the business owner, to know where you fit on the spectrum as far as banks are concerned.

loan sizes and change in

 

Take a look at the picture above.

Note the different categories involved in the chart.

1. Large business loans (more than $1,000,000)
2. Small business loans (between $100,000 and $1,000,000)
3. Micro business loans (below $100,000)

Notice which one is going up and which two are going down.

Here’s the moral of the story, if you’re seeking less than $1,000,000 your chances of being approved have fallen a staggering 33% in the past 15 years!

That’s not a small number when you’re talking billions of dollars.

So.

Where are you on that chart?

Depending on where you lie will determine how you go about getting a small business loan.

Here are the topics I’ll cover by each type of small business loan:

1. The starting point: how to determine which bank you can qualify for.
2. Documents needed based on your starting point
3. The loan process: how long it will take you to get funds. 

Step #1: The starting point: How to determine which type of bank you can qualify for.

Before you can get a small business loan, to increase your chances you need to look at the landscape of lending institutions out there.

You typically have the following options:

1. A Traditional Bank offering SBA loans
2. A Cash Flow Lending Institution
3. Investor Term Loans

Please realize that I want to help the vast majority of business owners out there. There are plenty of others that specialize in factoring, inventory, industry specializations and so forth. I don’t want to get into hedge funds and private equity in this conversation. I want to stick to the basics here because that’s where I can help the most.

A Traditional Bank offering SBA loans

To determine whether or not this is where you fall on the chart lets start with the fundamentals of qualifying for a traditional bank loan.

Understand a traditional bank loan:

A) Has the best rate possible
B) Takes the most amount of time
C) Requires the most documentation
D) Requires collateral
E) Requires two years of a profitable business

Ventury Capital has SBA loans.

We haven’t seen an approval for SBA loans with the business owner doing less than $500,000 a year. 

Cash Flow Lending Institutions

Cash flow loans, or revenue based loans, are a type of business financing that relies strictly on the amount of gross sales a business owner has.

To qualify for business revenue lending:

1) Minimum 6 months in business
2) Minimum $10,000 a month in gross sales
3) No minimum FICO score
4) If bankruptcy, must be seasoned a year
5) If tax lien or judgement must be on positive payment plan

Cash flow business loans are the quickest type of financing a business owner can get.

Investor Term Loans

Investor term loans are for businesses that are looking for a traditional style type of simple interest, monthly payment loan without the hassle of a SBA loan.

To qualify for a term loan the business must have the following:

1) Minimum 2 years in business
2) Minimum $250,000 in gross sales
3) Must show profit in 2 of the last 3 years
4) Debt service ratio must be above 1.2
5) Credit score must be above 650

 

Step #2. Documents needed based on your starting point

A Traditional Bank offering SBA loans

sba loans

Traditional banks require the most amount of documentation for business owners.

Here’s a full and extensive list of everything you need, thank you Small Business Administration 🙂

  • Business signed and dated federal tax returns for the past three years. Include all scheduled and attachments

  • Personal signed and dated federal tax returns for the past three years.

    • Need for all individuals that either own more than 10% of the firm or have a key position in the firm.Include all scheduled and attachments
  • Business financial statements for the past three years

  • Business balance sheet and profit and loss statements for the past three years. Include year to date.

  • If firm is under two years old need Two-Year Rule Waiver addressing how it meets the below objectives

    • Must demonstrate business acumen of management team
    • Business plan must demonstrate business management team can accomplish it’s goals
    • Adequate capital to perform objectives
    • Previous experience completing contracts for clients. Please have original copies of contracts. 
  • List of all private, federal, and non-federal contracts over the past two years

  • Business lease agreements

  • Proof of signature authority on firm bank accounts and business credit/debit cards.

  • Proof of capital contributions used to acquire ownership (for each owner)

  • Proof of any transfer of assets to/from the firm from each owner.

  • State filings 

    •  Articles of incorporation, articles of organization
    • Foreign corporation filings 
    •  Certificate of good standing
    • DBA filing if necessary
  • Governing documents, signed by the principals

    • Stock certificates and ledgers
    • Bylaws, operating agreements, partnership agreements
    • Meeting minutes
  • Background information and personal information for all principals:

    • Resume
    • Completed  Statement of Personal History form
    • Proof of U.S. citizenship or naturalization
    • Duties within the firm and time devotion
  • Financial information for all principals:

    • Signed and dated personal tax returns for the last three years (must include all schedules and attachments)
    • Completed personal financial statement form (from individual and spouse)
    • List of all assets, liabilities, real estate and other personal property, including transferred assets
    • Information on delinquent federal obligations, past due taxes or liens, bankruptcy filings and pending civil lawsuits
    • List of SBA loans for firm and other businesses owned by the principal(s)
  • Principals include:

    • owner(s) of more than 10% 

    • officers

    • directors

    • members

    • partners

    • key employees 

Wow.

Who has all of that?!?

It’s no wonder there is such a small percentage of business owners who can accomplish getting a SBA 7(A) Direct loan.

Cash Flow Lending Institutions

A working capital loan or a cash flow loan is based on a company’s future sales. These type of loans require the least amount of documentation to get a small business loan.

1) One page application
2) Last 4 Months of Bank Statements

That’s really all that’s needed for an offer. To fund the loan, the investor will require a business lease, a voided check, and a landlord verification. 

These loans can fund the same day but typically fund within 2-3 business days.

Investor Term Loans

Again, investor term loans are for businesses that want a traditional bank loan without the traditional bank loan headaches.

Here are the documents needed to get an investor term loan for your business:

1) Application
2) 3 years business tax returns (if you’ve been in business 2 years, we’ll take YTD profit and loss and balance sheet in lieu of tax return #3)
3) 1 Year personal tax return
4) 6 months business bank statements

Step #3. The loan process: how long it will take you to get funds.

A Traditional Bank offering SBA loans

Once you’ve gathered 1000 pieces of paper, you can now submit your file to a paper pusher behind the desk of a traditional bank. (Because that’s really what business bankers are in the branches) 🙂

A credit approval takes 10 days. So before you know whether or not you get past stage 1 of the process you’re two weeks into the process.

Then, you’re in the waiting game.

A typical SBA loan takes 4 months to fund.

Their due diligence is extensive as they only want the best of the best customers (which is a great business plan for the banks) but doesn’t really work for the small business owner looking to access capital. 

Check out this website: https://www.sba.gov/content/7a-loan-processing-time

They refuse to tell you how long it actually takes because, quite frankly, it’s embarrassing and business owners wouldn’t dare approach this if they knew the headaches.

Do you know someone who has been approved and gotten an SBA loan? 

Did they enjoy the process?

Cash Flow Lending Institutions

When you go to get a business revenue or cash flow loan and your application and bank statements are in here’s the process:

A) We evaluate the credit. Not to approve you, but rather to understand where the risk on the file lies.
B) Once we determine credit (takes about 1 hour) your file is submitted to a bank where your risk matches their risk
C) An approval is given (usually 4 hours later)
D) Terms are accepted
E) Contracts are generated and signed
F) Loan funds

Investor Term Loans

An investor term loan is much like a business revenue loan but it takes 5-7 business days to fund.

These investors do a bit more due diligence on the file.

A) A credit check is done immediately. If you’re below 650, you won’t qualify.
B) Tax returns and business bank statements are analyzed for profitability and consistency
C) Offer extended
D) The Terms are accepted
E) Loan goes to marketplace and funds

Conclusion

As you can probably tell, SBA loans are hard to get.

There’s loads of paperwork and time and effort put into achieving this type of loan.

And here’s the best thing you get with an SBA loan: a low APR % on your money. Prime plus margin. 

Prime has been 3.25% for awhile now and the spread is somewhere around 3% so you can expect around a 6.25% if you do get a business loan at a bank right now.

In reality with 10 year notes at 6.25% you’re paying atleast $0.30 for every dollar borrowed. Just check an amortization schedule at bankrate.com.

The goal here wasn’t to bash SBA loans as they are valuable for some business owners, but certainly not the majority.

The majority of small business owners will want to seek a revenue based loan or an investor term loan to lower the headaches involved in accessing capital to grow the company.

If you’re looking at getting a small business loan I hope this step by step guide was beneficial.