At some point, nearly every entrepreneur needs access to capital. Most often, that capital comes in the form of a loan, whether you will use it to finance an equipment purchase, cover monthly expenses or make an acquisition.
Establishing a relationship with a banker early on, when your business is getting started, is an important first step in getting access to debt financing later on. But don’t expect a lender to fork over cash to help you start a business. In order to qualify for a bank loan, you will typically need to show that your company has been operational for at least two years, has sufficient collateral to secure the loan and enough revenue to cover monthly payments.
“We believe it is very important to have a relationship with a banker you trust,” said David Park, head of business banking for City National Bank. “It’s not just about getting a loan – it’s about getting the right loan.”
When you’re looking for a lender, it’s best to start with one that participates in the U.S. Small Business Administration’s loan guarantee program, which encourages banks to lend money to small business owners by guaranteeing to repay a portion of the loan if the borrower defaults. SBA-backed loans offer low rates on long-term debt; they are made by authorized commercial lenders who set payment plans, interest rates and loan terms. City National Bank is a Preferred SBA lender; more information is available at: https://www.cnb.com/lending/loans-lines-credit/small-business/sba-lending.asp.
Which loan will your business need, and when? Here are a few of the most popular business loans, along with some advice about how to best use them:
Microloans: If you need to borrow a small amount, perhaps to buy inventory or boost your cash flow, and want to keep your debt to a minimum, a microloan may be worth investigating. In recent years, a number of nonprofit microfinance organizations have cropped up to serve small business’ borrowing needs. And the U.S. Small Business Administration has established its microloan program that lends up to $50,000 to qualified entrepreneurs, as well as its SBA Express program that lends up to $350,000.
Working Capital Loans: The SBA’s most popular program, the 7(a) loan, can be used for myriad purposes, including refinancing existing debt or purchasing a business. You typically repay the loan by making a monthly payment. Banks will probably want to see some business asset that can be pledged as collateral against a 7(a) loan and may ask you to sign a personal guarantee of repayment; your business will also have to demonstrate that it has sufficient cash flow to make the monthly repayment amount.
Credit Line: Because many companies experience a lag time between making a sale and collecting the sale proceeds through accounts receivable, they need to draw on a line of credit from their banks to keep their operations running smoothly. “Lines of credit are essentially advances against accounts receivable that are shortly going to turn into cash,” says Greg Crabtree, an Alabama accountant and author of “Simple Numbers, Straight Talk, Big Profits,” a finance book for small business owners. “When you draw against a line, it’s as if the bank is paying your customer’s invoice and the customer’s ultimate payment then goes to pay the bank back.”
Fixed-Asset Loans: The SBA’s 504 loan program is specifically for small business owners who need to buy heavy equipment, specialized machinery or commercial real estate. If you’re looking to buy an office building or warehouse for your business or you need to upgrade your manufacturing line, the 504 loan is likely to be your best bet because it offers repayment terms up to 25 years for real estate and up to 10 years for equipment.
The SBA also offers export-assistance loans to small businesses that want to sell products overseas and special loan programs for minority- and women-owned businesses. Talk to your banker about your needs and which loan is the right one for your company.
You’ll need to put together a loan package that demonstrates your credit-worthiness and shows that your business is a good risk, with references, customer testimonials and financial data. For more detailed information about specific loan programs available in your area, check out this interactive tool at BusinessUSA.gov.