I've been in banking for the last 7 years and I can tell that times have changed when it comes to applying for a small business loan. Especially for startups I think entrepreneurs have to know what is what before they are going to apply for a small business loan.
No business plan, no loan. Basically entrepreneur has to know exactly what is he going to do with the money. And all of that has to be put on paper and explained for lender's benefit: business summary, management experience, market research, operational part and 3 years of cash flow projections. You can find free business plan and cash flow projection template on SBA's website. Statement "Give me the loan and I am going to figure out my business" will get you a quick answer "No". Start up financing through bank or credit union is only done with SBA's guarantee. The most popular SBA program applied to start up funding is 7(a). The program is only a guarantee and not a loan from SBA. Financial institution is the one underwriting the loan and making final decision. There is also SBA 504 program available but it is only applicable if buying real estate. 7(a) program is the most popular and widely used since it is applied for leaseholds. In today's 2010still recession world you are expected to have at least 30% cash to put down. The funds cannot be borrowed from your family, credit cards or home equity line of credit. This will be verified by bank and SBA prior or at the closing. And believe me; I've seen few closing blowing up at the closing because of that. If you say funds are gifted you will be asked to provide an executed and notarized gift letter. As of August, 2010 SBA 7(a) program can guarantee as much as 85% on loans of up to $150,000 and 75% on loans of more than $150,000. (for some time as part of American Recovery Act Program guarantee portion was at 90%). And keep in mind if your total start up cost is $300K you are still going to be asked to put at least 30% down and the bank will finance the rest of $210K which means SBA's guarantee is only for $157,500 (75%). 75% guarantee is based on the loan portion, not on the total start up cost. According to SBA terms for 7(a) loans not involving real estate collateral generally can go up to 10 years. Financial institutions typically like to keep those terms at 5 to 7 years. So if you are starting restaurant, beauty salon or yogurt store calculate your projections based on 5 year repayment term. One of the nice things of 7(a) program is that SBA will dictate the highest rate the bank can charge: Fixed rate loans of $50,000 or more must not exceed the base rate plus 2.25% if the maturity is less than seven years, and the base rate plus 2.75% if the maturity is seven years or more. For loans between $25,000 and $50,000, maximum rates must not exceed the base rate plus 3.25% if the maturity is less than seven years, and the base rate plus 3.75% if the maturity is seven years or more. For loans of $25,000 or less, the maximum interest rate must not exceed the base rate plus 4.25% if the maturity is less than seven years, and the base rate plus 4.75%, if the maturity is seven years or more. Even if the loan has SBA 7(a) guarantee and you can put at least 30% down most banks still want you to put up collateral. Again keep in mind for financial institution collateral such as office equipment, restaurant tables, tanning beds or your inventory of ceramic cups is pretty much worthless. When the bank says "collateral" it means real estate. And yes, it has to have equity and yes, you will have to pledge it. Statement, "I am not going to pledge my house" will give you a quick answer, "No". Starting or buying a franchise makes no difference to a bank. If you are starting Quiznos all the same rules apply as if you are starting Billy Bob's sub shop. If you will be applying for SBA 7(a) loan the first thing you have to check is if that franchise is listed on SBA's approved franchise list. Just go on Franchiseregistry and you'll find out this in a few minutes. SBA 7(a) loans do have fees and those fees are steep. And they are not cheap. And no, if you are a start up a bank won't even consider conventional loan. Hers is the list of fees: For loans of $150,000 or less, a 2% guaranty fee will be charged. Lenders are again permitted to retain 0.25% of the up-front guaranty fee on loans with a gross amount of $150,000 or less. For loans more than $150,000 but up to and including $700,000, a 3% guaranty fee will be charged. For loans greater than $700,000, a 3.5% guaranty fee will be charged. For loans greater than $1,000,000, an additional 0.25% guaranty fee will be charged for that portion greater than $1,000,000. The portion of $1,000,000 or less would be charged a 3.5% guaranty fee; the portion greater than $1,000,000 would be charged at 3.75%. The best source when you are applying of a start up loan is SBA's website. It has examples, explanations of what is needed to know. It also provides you with valuable references to other helpful resources such as your local nonprofit entrepreneur organizations. Also always meet with a banker face to face. If you just go online and submit an application or go to a broker you will get that same quick answer "No". And yes, you will have to pledge unconditional personal guarantee and there is no way around it.
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