One of the biggest barriers for any small business is access to capital.
Whether you're selling goods or offering services, you naturally want to expand - and a lack of capital can limit your ability to grow your business.
You may be concerned as to whether or not your company fits the typical criteria for securing a loan. Or you might simply assume, "my business would never qualify for that!"
Either way, a Small Business Administration (SBA) loan might be just the solution you need.
An SBA loan is a bank-issued loan on which the U.S. Small Business Administration guarantees a portion of the principal on loan. "With Chase SBA financing, your business can take advantage of longer repayment terms and higher borrowing limits. Backed by the Small Business Administration, qualifying criteria is often more flexible than conventional financing."
We've compiled a list of five common questions about SBA loans to help you determine whether it's right for your business.What types of businesses qualify?
There's a common misconception that SBA loans are only for startups, but this is not the case. Most banks will assess your situation using conventional lending criteria first, but if your business doesn't meet the requirements, they can turn to the SBA to place a guarantee on the loan.
Put another way, any viable business is a potential candidate for a loan - you'll need to talk to your local banker or lending institution to determine their precise lending guidelines.How do you know if you're a good candidate?
Every financial institution has their own credit guidelines, but the basic criteria is essentially the same across the board when evaluating the credit-worthiness of an applicant. Sometimes these are referred to as the "C's" of credit. Depending on the bank they might have 3 or 5 or some other number of C's but to give you a general idea:
- Character - This is the willingness of the customer to repay, and generally involves looking at the individual's personal or business credit history. This is a reason to build your business credit, before you need it.
- Capacity - The ability of the borrower's cash flow to meet the loan obligations. If you are looking to start your own business think twice before you quit your day job - you're going to need to identify a source of repayment. If the cash flow isn't there, it will be difficult for a bank to approve a loan application for your business.
- Capital - Specifically, this refers to funds that support the assets and operations of the business. Whether that capital comes from owners, investors, or creditors, lenders will want to know what capital exists in the business already.
- Collateral - This refers to an asset - such as a building, equipment, or a vehicle - that helps secure a loan. When there isn't sufficient collateral in the business, it's common for lenders to turn to the SBA for a guarantee. A software design company, for example, might lack the larger assets (i.e. heavy machinery) that would otherwise function as collateral. In these cases, an SBA guarantee could make the difference.
- Condition - This refers to the operating environment of the company, and includes factors like the economy, the vertical in which the business operates, who their vendors are, etc.
The more criteria you meet, the more likely you are to receive favorable terms.Besides having an established credit history, what else can small businesses do to qualify for a loan?
Every lending institution is different - some require a minimum two-year operational history, others don't. In cases where the company is in business less than 2 years, banks will generally look at your existing and continuing W-2 income.
Developing a great business plan - with projections - can be very important. That's where the counselors at the nonprofit Service Corps of Retired Executives (SCORE)
can potentially help you (at no cost to you).
You'll also want to make sure that your CPA understands your goals of raising capital. Not having funds kept within the business can make it very difficult for the bank to identify a clear source of repayment, regardless of how long you've been operating. What types of expansions do these loans typically apply to?
The myriad of SBA products cover anything from a line of credit to equipment financing, to business acquisition financing, to the buying of a building, to a credit card. In other words, it can vary dramatically. The key is to work with your banker to ensure you are pursuing a lending product that fits with your need and use of the funds.What sorts of products are available?
If you need something short-term, a credit card
is probably the right product - that's the shortest form of access to capital and it's generally best for repayment over no more than a couple of months.
The next option is a revolving line of credit
. These typically run for under a year. It's a longer repayment cycle than a credit card, but shorter than a capital investment. This one is great in that you can continually access it, pay it off, and borrow again. It is like a credit card but the interest rates generally are lower and repayment is expected to take longer than a month or so but no more than a year.Term loans
are a long-term product - typically lasting anywhere from three to thirty years. This is appropriate when your loan needs to match the timeline of other commitments, such as a building lease. Always make sure the access to capital products matches your actual needs for the loan
. You don't want to find yourself locked into a building lease, without the capital to cover the expense.
Check with your banker today about SBA loans in your market - their advice is free, and it could be the most important step for your business growth!Thanks to Gretchen Lin of JPMorgan Chase for acting as our subject matter expert on SBA loans. For those of you considering diversity certification, it's worth noting that much of the documentation needed for an SBA loan is required for filing a diversity certification application. In other words, if your certification application is done correctly, you'll have your "ducks in a row" if you're considering an SBA loan!
|Gretchen Lin||About Chase|
Chase is the U.S. consumer and commercial banking business of JPMorgan Chase & Co. (NYSE: JPM), a leading global financial services firm with assets of $2.4 trillion and operations worldwide. Chase serves nearly half of America's households with a broad range of financial services, including personal banking, credit cards, mortgages, auto financing, investment advice, small business loans and payment processing. Customers can choose how and where they want to bank: 5,500 branches, 18,000 ATMs, mobile, online and by phone. For more information, go to Chase.com.
Chase and the SBA
Chase is a preferred SBA Lender.
Companies that make the relatively small time and financial investment to get certified and apply the proper strategies to use your certification will see a strong return on their investment.