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Category:
Published: May 2007
Learn how to obtain financing when starting a new business.
Getting the money. The best ideas, the best laid out business plan can stall and come to a screeching halt unless you have the necessary fuel to keep your business engines running. Almost all financing is going to come through some form of commercial lending. The thought that there are all sorts of grants or free money from the government, popularized by commercials we see on tv for books to get you that money, is far from reality.
The reality is that, unless you are going to be a not-for-profit type entity, there are almost no such monies available. Sometimes, however, you can look for local programs. Is your proposed business in an economic development zone at the municipal level? You might get some sales tax incentives, tax breaks, discounts or rebates on utilities. You may get some assistance with loans at low rates. For example, locally, there are some available incentives via the Schenectady Metroplex.
Typically, the money is going to have to come through your success in persuading a commercial lender for a loan. This, of course, starts with your credit score. See whereby you can check any of the three credit bureaus one time a year at no cost. However, you should expect to pay about $6.00 to $15.00 for your credit score. Most commercial lenders will look for a score of 680 and higher. If you have had a prior bankruptcy, you are not necessarily out of the game. What was the reason? For example, a bank might still be interested if your bankruptcy was because of some sort of medical illness in the family.
Banks will be studying your business plan very carefully. They will be considering what experience you have in the business endeavor you proposed and the extent to which you will be personally involved in the endeavor. Banks are going to look at your cash flow analysis what is the income stream and when will it start to come in? What is going out in expenses monthly? They will be looking at your personal financial statement: after your own personal living expenses and debts, what is going to be left over for debt service with regard to the bank's loan? A lender will not only be looking at your revenue and expenses and overhead, but also your profit margin. This will be tested as against industry averages. A lender will consider issues of competition: who will be your customers tomorrow? They will consider how the work is going to get done. If your business has cycles, will you be able to bring in enough cash in the dry months to cover your payroll and debts? (Sometimes a line of credit can also be secured).
You really need to have all these issues carefully analyzed and any weaknesses addressed before you see a lending officer. Do not respond to a lending officer's inquiry of how much money you will need by telling the officer something along the lines of as much as you can get. That sends a very clear signal to an officer that you have not thought out your business plan at all. You should be able to articulate fairly exact numbers on each of the above and demonstrate a basis for the same. You may need professional help from an accountant. At no cost, the New York State Small Business Development Center (Harriman Business Center, Building 7A, Room 500, 1220 Washington Avenue, Albany, New York 12226) can help you develop a business plan which will address these issues. They may also help you find some financing as they work with a consortium of over 50 banks. Fairly new to commercial lending are credit unions. For example, the State Employees Federal Credit Union now has an open charter. Being turned down by one lending institution does not mean that you are going to be turned down by all of them. A persistent entrepreneur with a strong business plan should eventually be able to secure a loan. Keep trying. The most frequently turned down businesses are restaurants.
The Small Business Administration (SBA) could be your most valuable resource in getting financing. Their website is www.sba.gov. SBA loans may have longer terms for repayment, may require less of a down payment giving a small business owner more initial capital. SBA loans are also fully amortizing such that, unlike many conventional loans, there will be no balloon payments at the end. With the SBA 7(a) program, you can get up to 90% financing with a fully amortized term of up to 25 years and with an interest rate of prime plus up to 2.75%. It is possible to secure a fixed rate, as a present writing, that could be anywhere from 7.75% to 8.75%. It is also possible to start with a floating rate and convert to a fixed rate. With the loan you can acquire commercial real estate, acquire equipment or inventories, or use the loan for construction. A second loan vehicle, an SBA 504 loan, is used only for fixed assets like land, buildings or equipment. An SBA 504 loan is done through the Certified Development Company (CDC) and involves mixed financing, e.g., 50% of the loan is through a bank which has a first mortgage, 40% through the SBA which takes a second mortgage and 10% borrower down payment. Special use properties such as restaurants or hotels will require another 5% buyer down payment on the purchase. SBA loans are available through commercial lenders. What the SBA is doing is guaranteeing the majority of the loan. The entrepreneur can expect to provide a personal guaranty of 20% or more, typically secured through a second mortgage on a home.
If the property you are buying is going to be less than 51% owner occupied, you will not be able to get an SBA loan. SBA loans cannot be applied to what is considered passive income, e.g., investment properties. This is viewed as using government funds for investment purposes.
If you utilize a lender which is "preferred", the SBA gives that lender the ability to make decisions on behalf of the government in approving your loan. The process is not as slow as you might think. An SBA lender could give you a decision in a week or so and you could get funding within a month or two. Loan terms are up to 25 years for a construction loan or purchase or refinancing of real estate, up to 10 years for the purchase of machinery and equipment, and up to 7 years for working capital. The SBA, which is guaranteeing the money to the bank you utilize, will charge a fee of up to about 3% of the guaranteed portion of the loan and this closing cost can be financed into the loan.
In our next issue, we'll talk about some winning business plan strategies so that you will be able to persuade the bank officer to approve your business for a loan.
This article is for illustrative purposes only. You should consult your own personal attorney and tax consultant in any business matters.
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