Small Business Loans
 

Including Traditional Lending Requirements, SBA, Commercial Real Estate Lending, and Private Money Financing

Remember your Lender is in business to make money. Consequently, when a Lender or Bank lends money it wants to ensure that it will be paid back. A bank may also represent the Small Business Administration (SBA). SBA financing usually is guaranteed to the bank and provided to the bank and then lent to the borrower. The SBA does NOT lend direct to the borrower therefore, the bank must consider it’s own lending criteria which will also include the 5 C's of Credit each time it makes a loan.

The 5 C's of Credit – Traditional Lending Criteria

Capacity to repay is the most critical of the five factors. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history on existing credit relationships - personal and commercial - is considered an indicator of future payment performance. Prospective lenders also will want to know about your contingent sources of repayment.

Capital is the money you personally have invested in the business and is an indication of how much you will lose should the business fail. Prospective lenders and investors will expect you to contribute your own assets and to undertake personal financial risk to establish the business before asking them to commit any funding. If you have a significant personal investment in the business you are more likely to do everything in your power to make the business successful.

Collateral or guarantees are additional forms of security you can provide the lender. If the business cannot repay its loan, the bank wants to know there is a second source of repayment. Assets such as equipment, buildings, accounts receivable, and in some cases, inventory, are considered possible sources of repayment if they are sold by the bank for cash. Both business and personal assets can be sources of collateral for a loan. A guarantee, on the other hand, is just that—someone else signs a guarantee document promising to repay the loan if you can't. Some lenders may require such a guarantee in addition to collateral as security for a loan.

Conditions focus on the intended purpose of the loan. Will the money be used for working capital, additional equipment, or inventory? The lender will also consider the local economic climate and conditions both within your industry and in other industries that could affect your business.

Character is the personal impression you make on the potential lender or investor. The lender decides subjectively whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company. Your educational background and experience in business and in your industry will be reviewed. The quality of your references and the background and experience of your employees will also be considered.

See the following Websites to check your credit history:

• Are there credit problems to clear up? www.annualcreditreport.com free access
• Are there credit items that you do not know about? www.truecredit.com/fool
• Do you know your credit score? www.creditkarma.com

Small Business Loans Guaranteed by the Federal Government

About the United States Small Business Administration (SBA)

The SBA, established in 1953, provides financial, technical and management assistance to help Americans start, run, and grow their businesses. With a portfolio of direct and guaranteed business loans and disaster loans worth more than $59 billion, SBA is the nation's largest single financial backer of small businesses. Last year, SBA and its resource partners offered management and technical assistance to more than 2.6 million clients. SBA also plays a major role in the government's disaster relief efforts by making low-interest recovery loans to both homeowners and businesses. America’s 25 million small businesses employ more than 50 percent of the private workforce, generate more than half the nation's gross domestic product, and are the principal source of new jobs in the U.S. economy. Under the new 2009 Stimulus Plan all SBA fees have been waved to the borrower and the guarantee to the lending bank has been raised from 75% to 90%.

See www.sba.gov for complete information especially

• SBA's Preparing and Presenting a Loan Proposal
• SBA's Loan Package Checklist

Basic SBA 7(a) Loan Program

7(a) loans are the most basic and most used type loan of SBA's business loan programs. Its name comes from section 7(a) of the Small Business Act, which authorizes the Agency to provide business loans to American small businesses.

All 7(a) loans are provided by lenders who are called participants because they participate with SBA in the 7(a) program. Not all lenders choose to participate, but most American banks do. There are also some non-bank lenders who participate with SBA in the 7(a) program which expands the availability of lenders making loans under SBA guidelines.

7(a) loans are only available on a guaranty basis. This means they are provided by lenders who choose to structure their own loans by SBA's requirements and who apply and receive a guaranty from SBA on a portion of this loan. The SBA does not fully guaranty 7(a) loans. The lender and SBA share the risk that a borrower will not be able to repay the loan in full. The guaranty is a guaranty against payment default. It does not cover imprudent decisions by the lender or misrepresentation by the borrower. Under the guaranty concept, commercial lenders make and administer the loans.

SBA 504 Program

SBA 540 real estate financing guaranteed by the government to “preferred” banks.

Oftentimes this is referred to “Brick and Mortar” financing for long-term, fixed rate financing to:

• Purchase land and construct new buildings
• Purchase and renovate existing buildings
• Acquire & Install machinery
• Expand existing facilities
• Terms: 50%/40%/10% (special purpose property 50%/35%/15%)

For assistance in filling out a SBA loan application call Denise Beeson, (707) 544-5696.

Requirements for Buying or Refinancing Commercial Real Estate

• Identify Real Estate
• Make Offer
• Arrange Financing:-Appraisal (@$4000)-Application (@$2000)
• Documents Requested (Lenders vary, but be prepared to supply)
• 2-3 years Tax Return of business
• Current/interim Business Financial Statement, (FS)
• Owner(s)/Guarantors: last 2- 3 years Tax Return; 2-3 years Financial Statements (Personal Financial Statements; Resume of the owner(s), especially noting years in industry (2)
• Legal Entity i.e. Articles of Incorporation, LLC etc.
• History of the business & Current description of the Business (ideally a Business Plan)
• List/Description of all personnel, particularly the Licensed personnel, including number of years employed by this business and number of total years of professional experience.
• Copies of Licenses i.e. Liquor (if applicable)
• Copies of the last 3 years State/County Health and other departments inspections. Note: infractions, deficiencies, violations during the last 3 years (if applicable)
• Copy of all insurance coverage: General Liability, Malpractice, E&O (Insurance copy if applicable)

Private Money Lenders

A “hard money” lender is typically a private lender that will lend money to more high risk borrowers or borrowers that do not “fit” into standard underwriting criteria; and, they in turn charge a higher interest rate. They also provide short term loans which are also referred to as bridge loans. The interest rates on these loans are typically between 9% and 13% for real estate hard money loans, which may be higher than the average bank.

Hard Money Criteria

• Up to $5,000,000 per transaction on the same project
• Up to 66% LTV improved structures, up to 40% LTV raw land
• Commercial property purchases or refinancing
• Ask about brokered construction loans
• Bank workouts, bankruptcies and foreclosures are common
• Loans on commercial buildings, vacant land

Loan Application Requirements for Private Money Loans

1. Loan Application or current financial statement (less than 6 months old)
2. Signed Tax Returns for 2 most recent years. (Corporate and Individual, if applicable.)
3. Borrower's credit report.
4. YTD Operating Statement for subject Property
5. Rent rolls and copies of all rental/lease agreements.
6. Appraisal or Documentation of Estimated Value
7. Written "Use of Proceeds" letter
8. Color pictures of subject property

Call Denise Beeson (707) 544-5696 or (707) 694-6826 to apply for a Private Money loan.