Business blog

In business, obtaining an unsecured business loan is probably one of the most difficult feats. This is especially true given the current nature of our economic climate and ongoing regulatory changes for lending. Unlike the earlier part of the past decade, banks and finance companies in the wake of the fallout from the housing market have increased lending standards across the board. As we have discussed in previous articles, while interest rates have remained low, banks and finance companies have still put substantial restrictions on the business loans that they grant. This is primarily due to the “fear factor” that is still coursing through Wall Street regarding the securitization and aggregation of closed business loans.

In regards to securing an unsecured business loan, the key is that you must have an expansive credit history coupled with an expansive business history. At this point and time, it has become nearly impossible to obtain a secured business loan or other unsecured credit facility. As such, it is very important that when you approach a potential lender for an unsecured loan that you have both of the aforementioned components for both your personal financial situation and your business financial situation.

Today, the only time a bank or finance company will grant an unsecured business loan is if your business already has substantial assets and an extensive history of generating a positive cash flow. Companies that fall into this category typically consist of professional service firms such as medical practices, law practices, and accounting practices wherein the professional can always earn an income from his or her services. Outside of professional practices, healthcare companies are typically able to receive unsecured business loans although this is become less frequent given the recent changes in healthcare legislation.

As has been one of the topics discussed throughout these articles, credit scores are extremely important when applying for business loans. With lending standards tightening among all banks and financial institutions, it is imperative that you have a credit score that implies that you are a worthy credit risk. A credit score is calculated based on a number of factors including your past payment history, your current debts, how long you have had credit, and whether or not you have any delinquent accounts. Today, most lenders want to see a credit score above 680 if they are going to grant you a business loan.

When looking for business loan, you should pull all three of your credit reports from the three major credit bureaus (Equifax, Trans Union, and Experian). Each bureau maintains its own records so it is important to ensure that the information on each of your reports is correct. Most banks now look at all three different reports to make sure that there are no discrepancies.

If your current credit is not in a good state then you may want to talk to your accountant or a properly licensed credit counselor before applying for a business loan. They will be able to assist you in making appropriate decisions regarding how you can improve your credit score so that when you do apply for a business loan – you will have no issues pertaining to your credit.

As we have discussed earlier, if you have an outstanding business project that needs financing but you do not have an appropriate credit score then you may want to seek alternative methods of finance. This can include bootstrapping your business or seeking equity investments from private investors. You may also want to go to familiar sources such as family and friends as potential lenders/investors in your business venture.

In addition to filling out the 7a SBA loan application, you will also be required to present your lender with a business plan that explains what you intend to do with the loan funds, the anticipated financial results of your business, and what service/product your company offers. According to SBA lending professionals and experts, your business plan is about 33% of the ultimate decision of whether or not to lend to a small business.

As we have discussed in other articles, if you have having trouble developing your business plan then you may need to hire a business plan consultant that can assist you with this process. This is especially important if your small business operations on a more local basis as local demographic research, local competitive analyses, and local economic analyses will need to be completed. Banks and finance companies, given the current economic climate, now always verify the information in full on any given loan submission document including the business plan and formal loan application.

There is no wrong or right way to write a business plan. However, any business plan that you create should have the following components according to the SBA:

A detailed executive summary
An overview of the Owner(s) of the business.
The anticipated financial results for the business over a three year period.
Usage of 7a SBA loan funds.
Personnel overview and an overview of the corporate organization
A highly detailed marketing plan
A description of the products/services that are selling to the general public.
Previous operating history (if available)

In the even that you are seeking to acquire an already established company then you should have that business owner provide you with all of the necessary financial documentation related to the previous operations of the business so that it can be put into your business plan. A certified public accountant will be able to do this for you if you are unable to do so on your own.

While the primary focus of our discussions has been regarding the 7a SBA Loan, there are a number of other types of loans that are guaranteed by the Small Business Administration. These include the SBA 504 loan program, the Microloan program (which has some overlapping features with the SBA 7a loan), and the disaster assistance loan program.

The foremost guarantee program besides the 7a is the SBA 504 program, which is also known as the CDC loan (“Certified Development Companies). This highly specialized lending program is specific for providing long term and fixed rate financing to acquire large assets such as real estate or equipment. It is specifically designed for traditional businesses that operate “brick and mortar” type facilities. For instance, this type of loan would be most appropriate for a small scale manufacturer that needs a large fixed rate loan to purchase a new piece of manufacturing machinery. If this is the primary need of your financing then you may want to look at this program as an alterative to the 7a SBA loan. The maximum loan amount via the SBA 504 program is $1.5 million or $2 million if the business conducts business with the federal government or a state government.

The Microloan programs provided by the SBA provide financing for businesses that need less than $35,000. These loans are primarily used for ongoing inventory purposes, cash flow management purposes, or inventory acquisition purchases. This is also one of the small business lending programs that is available to not for profit foundations (although they can only be used for purposes the benefit the community).

Finally, there is the disaster assistance loan program. Unlike other aspects of SBA programs, this loan can be used by individuals. However, this is not a frequently used program as it is specific only to when major disasters occur.

As we have stated before, the SBA provides a tremendous amount of flexibility when seeking business financing. Despite the fact that this site is dedicated primarily to the 7a SBA loan, there may be a number of other financing options that would be well suited for you needs.

According to the Small Business Administration, companies that can qualify for the 7a SBA loan must meet certain small business size standards. These standards vary greatly by industry, but the general rules of thumb are as follows:

Farming businesses must not have revenues exceeding $750,000
Building contractors can have a maximum revenue of $14,000,000
Retail and service businesses can have maximum revenue of $7,000,000
Heavy construction trades and industries have maximum revenues of $33,500,000.

Additionally, there are headcount tests regarding the number of people that work for your business. For wholesale trade industries, the maximum number of employees is 100 while manufacturing firms can have a maximum of 500 employees. However, these rules are not hard and steadfast. The SBA and its associated lenders understand that revenues can fluctuate as can the personnel summary of your firm. As such, it is imperative that you speak to you 7a SBA loan representative to determine whether or not your meet the standards discussed above. However, as many entrepreneurs seek to use this type of credit facility for starting a new business then the standards discussed above typically do not apply to your business. If your business becomes highly successful and requires additional capital then you may start to require traditional business loan financing rather than debt through programs like the SBA 7a Loan.

It should also be noted that based on inflation and industry trends, the Small Business Administration regularly reviews and updates its business eligibility standards based on revenues and personnel numbers of businesses across a number of different industries. If you are having trouble determining whether or not your existing business qualifies for a 7a SBA loan then you should speak directly to a SBA representative, your banker, or your accountant.