MCDA CCG, Inc. will help you decide if a small business loan is right for you and how to apply for one if you decide it’s the right move.
For a small business to succeed, it must be adequately funded. At times, business owners realize that they need more money to keep their company smoothly functioning or to finance some sort of expansion. These situations might require taking out a loan.
Our preparation guide will:
1) Help determine if a loan is right for you
2) Prepare you for questions that a lender will ask
3) Describe the types of loans available and the pros and cons
4) Explain the difference between secured and unsecured loans
5) Familiarize you with SBA (Small Business Administration) loans
Is a Loan Right For You?
First, you must determine if obtaining a loan is necessary or if your main issue is a complication of cash flow. If cash flow is at the root of causing financial difficulties, MCDA CCG, Inc., can assist you in accelerating your receivables and analyzing other areas of your business for improvement.
If you decide that securing a loan is the best decision, be certain that it aligns with the goals of your business plan. If you do not have a formal business plan you need to write one. Having a business plan is a crucial step, if you decide to pursue a loan, majority of lenders will have it as a requirement. If you need assistance is preparing a business plan we can help. We have successfully created numerous business plans and secured funding for our clients with all major lenders.
Questions Lenders Will Ask You
One of the first questions a lender will ask is, “Can you repay the loan?” After all, lenders are business people who also need to make a profit. Lenders will determine if you can by taking a look at your credit history and financial documentation.
Lenders utilize three main criteria to decide whether or not to approve you for a loan. They are:
1) Your personal credit scores
2) Your time in business
3) Your annual revenues
Traditional banks have different factors that will be important compared to an online lender. Be prepared each way.
Younger stage companies generally find it harder securing loans because they don’t have an established track record. Establish a business credit profile as soon as possible to increase your odds of securing a loan.
Lenders will also question your “plan B”, in the event your reason for obtaining the loan is unsuccessful. For example, if the loan is to fund a specific project that is designed to increase revenue, and it fails, they will want to know and feel comfortable that you will still be able to make your regular loan payments.
In addition to getting your credit score in the best possible shape, you will want to gather the appropriate paperwork that you will likely need, including:
– Business Financial Statements – Examples are a current profit and loss statement from the last three fiscal years, a cash flow statement and your balance sheet.
– Bank Statements – A minimum of 3 months, but 6 is more acceptable
– Personal & Business Income Tax Returns – The last three years. If your business is new, then just prepare whatever you have along with three years of personal returns.
– Ownership and Affiliations – Including any other businesses you have a financial interest in and any business partners.
Pros and Cons of Various Loan Types
Choosing the type of loan that best fits your needs and repayment ability is a critical decision that should not be taken lightly. You should only take out a loan that will help your business, not saddle you with debt.
Line of Credit Loan – Short-Term option which is often considered a useful option for small businesses. With a line of credit, a certain amount of cash if given to you to draw from. You only replay the amount you draw and that is the only amount you pay interest on.
Term Loan – This loan type is the one most people are familiar with. It is available in both short and long-term versions, with generally lower interest rates for longer term loans. A borrower receives a lump sum of cash up front and makes monthly repayments of principal and interest. These loans generally require collateral.
Specialty Financing – Specialty financing includes loans for specific purchases. You will often find specialty financing when you are looking at leasing or buying a specific piece of equipment such as a copier or possibly a CNC machine. Equipment loans are usually paid over the estimated lifespan of the equipment you are financing and the equipment itself serves as the collateral. Specialty financing also encompasses commercial real estate loans. The main issue with these loans is that the loan in some cases outlasts the life of the equipment.
Invoice Financing – With invoice financing, you use unpaid invoices as collateral to secure a cash advance, which is equal to a percentage of the invoice. You repay the advance once the invoice is paid, along with a fee. A very similar service is invoice factoring, where you sell your outstanding invoices to a factoring company for it to collect on.
Merchant Cash Advance – These are similar to a payday loan, a merchant cash advance is an extremely expensive form of borrowing where you get a cash advance in exchange for a percentage of future sales. Because these are designed as very short loans, and repayment is typically taken out daily, they can have the equivalent of a 75-200% APR. The upside is that these loans are extremely quick and simple to get. At MCDA CCG, Inc., we do NOT recommend Merchant Cash Advances as a suitable solution. Contact us for more details.
Personal Loans – If you have a strong personal credit score-but your business is newer or you have no collateral-you might consider taking out a personal loan for your business expenses. Keep n mind that if you default on the loan, it will impact your personal credit.
Secured and Unsecured Loans
In order to receive a secured loan, you must provide collateral. The collateral, which can be real estate or inventory, must outlast the loan. Interest rates in most cases are usually lower for secured loans.
Unsecured loans typically have higher interest rates because the borrower does not have collateral to be claimed by the lender if the borrower defaults. You will only be able to obtain an unsecured loan if the lender considers you low risk. To be considered low risk, that means that your company has been profitable and the lender considers your business to be in great operating condition.
Small Business Administration (SBA) Loans
The government body-known as the Small Business Administration (SBA)-doesn’t directly loan money to small business owners. Instead, they work with partner lenders to make it easier for small businesses to get loans. The SBA guarantees a portion of the loan, meaning if the borrower defaults, and the lender is unable to recoup its costs from the borrower, the SBA will pay that amount. This makes the loans less risky for a lender, which in turn improves the odds of approval.
Some advantages of SBA – guaranteed loans are long borrowing terms, low interest rates and high borrowing amounts. Another significant plus is that some loans with the SBA offer support to assist borrowers in running their business successfully.
SBA loans range from $500 to $5.5MM and can be used for almost any business need. In general, collateral isn’t always needed and they require lower down payments.
To qualify for an SBA loan your business must be physically located, and operate from the Unites States or its territories. It must also be officially registered and a legal entity. In order to apply for a loan, you must provide a statement of purpose, a business plan, and your financial statements (Including a personal financial statement).
Borrower Beware!
As with any business transaction, ensure you are treated fairly. Look out for these lending practices:
- Interest rates that are significantly higher that other competitors
- Being asked to lie on paperwork
- Being told to leave signature blocks blank
- Lenders who impose unfair terms on borrowers, either by deception or coercion.
- Fees that are more than 5% of the value of the loan
- Being pressured to take the loan
Bottom Line
Taking out a loan can be beneficial to keeping your company on the right financial track. It is important to decide when you need the money and exactly how much you need. The most critical factor is ensuring that you will be able to make your payments on time. You do not want to ruin your hard work and company reputation be being deemed a credit risk – furthermore you do not want to damage your personal credit.
While securing a loan opens doors of opportunity for your business, the preparation required for initial evaluation can seem arduous and daunting on your own. Before you request a loan, you’ll need multiple documents on hand-specific information about your business, financial records, personal documentation, and so much more. Do it with complete confidence the first time, and contact us to help you by offering critical advice and well rounded support. Our team of experts possess the necessary education, skillset, and experience to make this ordinarily high-stress process as simple as possible. All you have to do is contact us today and you can have peace of mind going forward.