There are a variety of funding sources available for established businesses. As general parameters businesses need to meet the following criteria to qualify for loans:
- the company should be at least two preferably three plus years old;
- the business should be profitable (especially over the past 12-18 months)
- the company or owner(s) should have collateral to secure loans; and
- the company and owner(s) should have a good credit record.
Businesses can access both short term and long term loans to support these enterprise. It is very important to use these funding resources appropriately with a business. For example bank lines of credit are great for covering operating expenses. Lines of credit are a lousy way to buy a piece of equipment though. Businesses need to use term loans to purchase equipment, real estate, and other long living assets.
In order to put your best foot forward with lenders a business should pull together the following information to support a loan request:
- 3 years of business tax returns;
- 3 years of personal tax returns (for all owners with 20+ percent stake in business);
- Personal financial statements (for all owners with 20+ percent stake in business)
- interim financial statements (profit and loss) for the last 60 days;
- Company and personal bank statements for the last year;
- Current list of accounts receivable and accounts payable;
- Copies of legal agreements (articles of incorporation, by-laws, operating agreements, leases, promissory notes, etc.);
- A list of items being funded with loan proceeds (include invoices or purchase orders);
- A financial projection for at least one year; and
- A brief business plan that describes the company and the proposed expansion project (or loan request)
Loans and Other Programs
Rural Community Development Resources (RCDR) – is a Yakima County-based small business lender that focuses on microlending. RCDR provides small, short-term loans to small business concerns as well as certain nonprofit organizations. Rural Community Development Resources uses its “family of loan funds” to support emerging and established businesses. Loans range from $5,000 to $75,000. A borrower must submit all documents listed above to be considered for a loan and RCDR typically requires an applicant to take some of their business development classes or submit a business plan supporting their loan request.
The Small Business Administration offers two loan programs that are used in partnership with banks and commercial lenders.
The SBA 7A program encourages small business lending by providing repayment guarantees to banks and lending institutions that make loans to small business. Lender that use the 7A program get a 75-85% repayment guarantee. Financial institutions must certify that they cannot do the loan without an SBA guarantee. The SBA 7A program allows lenders to make more small business loans and often provide better terms for borrowers. Small businesses can borrow from $25,000 to $5 million using the 7A program. Interest rates are typically prime + 2.25-3.00% depending on loan amounts and terms. To obtain an SBA 7A loan you will make a request through a participating bank.
The SBA 504 loan program provides financing for major fixed assets like equipment and buildings. Under the 504 program the SBA actually funds a portion of the project in partnership with a commercial lender. Typically a lender will fund 40-50 percent of the project and an SBA-designated Community Development Corporation will fund 35-40 percent of the project. The borrower benefits because the SBA financing package typically lowers the equity they need to invest in the project. Loan terms are often more favorable too. Small businesses can borrow from $100,000 to $5 million using the SBA 504 program. Interest rates on the 504 loans range from 4.5 to 6+ percent depending on loan terms. To learn more about obtaining an SBA 504 loan visit www.evergreen504.com
SBA loans have certain job creation/retention requirements. Check with a bank or lender to determine eligibility.
The US Department of Agriculture’s operates a Business and Industry Guarantee program similar to the SBA 7A program. The USDA guarantees 60-80 percent of eligible bank loans made to farmers, coops, rural businesses, nonprofits, and tribal governments. Loan proceeds can be used for working capital and fixed assets. Business can borrow from $100,000 to $10+ million (larger amounts must be approved by USDA). This program helps lenders make more rural loans and borrowers typically receive more favorable loan terms compared with conventional loans.
Established manufacturing companies can also use industrial revenue bonds to support fixed asset financing needs. Rates for bond financing can be significantly lower than conventional loans because the bonds carry a tax exempt status. Revenue bonds cannot exceed $10 million and the practical minimum amount of bond financing is $2 million. A company cannot use bonds if they have spent over $10 million at their facility over the last three years OR plan to spend over $10 million at their facility over the next three years. For more information on industrial revenue bonds contact the Yakima County Development Association at 509-575-1140 or firstname.lastname@example.org.
Other Financing Options
In addition to the most common loan programs listed above there are a number of other financing tools for business:
Operating lines of credit are used by businesses to cover short term temporary borrowing needs. Like a credit card, operating lines provide a certain maximum amount of funding that the business can access at any time. Operating lines of credit are typically extended to more established firms that have significant short term assets like accounts receivable (money due from customers) or inventory. These assets are typically used as collateral for the line of credit.
Factoring is when a business sells its accounts receivable at a discount in return for funding to run the business. This financing route is typically taken by companies who cannot for one reason or another obtain term loans or operating lines of credit.
Leasing equipment or facilities is another funding option. Instead of using scarce equity or going without, there are many companies that will lease business equipment.
There are also some new creative “crowdfunding” financing alternatives that are becoming available due to changes in federal laws. Most of the sites are currently more oriented to supporting causes, artists and musicians BUT there are growing opportunities to connect with online investors across the country. Crowdfunding is new and while there are more online investment options available it still takes caution and due diligence to go for crowdfunding options. Check out the Top Crowdfunding Websites.