Loans / Lines of Credit
There are MANY sources of loans and lines of credit for small businesses. We will list several options to consider. We have checklists to prepare your approach to a lender to put forth a great first impression. Most lenders consider the “6 C’s” of lending which are:
- Character: do the 20% or more owners pay bills, undertake good business practices?
- Capacity: will the business generate enough cash flow to repay the loan?
- Capital: will the business have enough working capital, with the loan, to be successful?
- Collateral: what assets are available to offer to the lender to recover their loss if the loan is not repaid?
- Conditions: is the business good NOW, in the industry it serves, at this time and place in the economy?
- Credit score: 20% or more owners must meet certain credit score minimums, depending on the lender.
Concerned about any of the above? There may be viable options, such as co-signers, alternative lenders, CDFIs, SBA-backed loans, and more.
Micro financing refers to very small credit lines, such as a bank business credit card. This is often the first step to establish business credit. The objective is to start with a small amount, demonstrate ability to pay and ability to take on and repay larger amounts (i.e. demonstration of capacity).
Micro Loans are loans for small amounts (typically less than $50,000). Rates vary depending on the source of the loan and what type of collateral is available. Some microloans, from community non-profits or CDFIs may have no interest rate (designed for underserved populations or communities).
Term Loans are used for long term investments, including equipment, debt refinancing and commercial real-estate. With term loans businesses receive a one-time infusion of capital and pay it back over the term of the loan.
Working Capital Loans or Lines of Credit are sought for cash needs for the operation of the business. These are often sought when the company isn’t sure how much money it needs or for how long.
SBA Loans are available for companies that have special circumstances or may have trouble accessing traditional financing (bank loans). SBA offers Microloans, Lines of Credit, Working Capital Loans, Equipment Loans, Disaster Loans and Invoice Protection for International Trade.
Other 0ptions that aren’t quite loans are common among Alternative Lenders. These include Invoice Financing, ACH, Bank Statement or Cash Flow Advance; Invoice or Accounts Receivable Factoring, and Equipment Leasing or Financing which we will not discuss in this section.
Loan Sources in Central Virginia
Banks offer microloans through local branches if the borrower has adequate collateral. If collateral is a challenge co-signers may be considered or other microloan sources may make sense. Federal SBA loans may be considered, as well as Central Virginia’s CIC Microloan program.
The Small Business Administration Microloan Program provides funding to non-profit lenders (intermediaries) which, in turn, may provide direct loans of $50,000 or less to small businesses.
- Interest rates vary, depending upon the intermediary lender and costs to the intermediary from the U.S. Treasury. Generally these rates will be between 8% – 13%. Applications are submitted to the local intermediary and all credit decisions are made on the local level.
- Each intermediary lender has its own lending and credit requirements. However, business owners contemplating application for a microloan should be aware that intermediaries will generally require some type of collateral, and the personal guarantee of the business owner.
Community Investment Collaborative Microloan is administered by CIC for businesses that meet at least one of the following criteria:
- Have graduated from CIC’s Entrepreneur Training Workshop
- The business has been operating for 6 months and is able to provide financial statements and a business plan
Terms: Starting interest rate is currently 9.75% (beginning in April, 2015). Discounts to the starting rate are available based on the following:
- Being a graduate of our Entrepreneur Workshop (2 percentage points)
- Having a co-signer on the loan (1 percentage point)
A CIC Entrepreneurship Workshop Graduate with a co-signer on the loan is eligible to borrow at 6.75%.
Virginia Small Business Finance Authority considers small loans to businesses that have been in business for at least 2 years, minimum credit score of 650 for owners/guarantors, maximum term of 4 years, and interest rate of no more than prime + 3%, maximum loan of $10,000 with exceptions up to $25,000 if SBDC, such as CV SBDC technical assistance has been or is being provided.
Traditional Banks are also doing micro-loans in our region, typically when an account already exists in the bank or when a founder has accounts in the bank.
Commercial credit cards are also options for early businesses. For first time business owners without established credit, the credit might need to be collateralized. Alternatively, small amounts of credit on credit cards are offered.
Commercial Loans (Working Capital or Term Loans)
Traditional banks loans can range from micro-loans to millions of dollars. We recommend getting to know bankers in your region early, even if you are not ready for a bank loan. Consider what your business plan includes when choosing a bank. There are many excellent, experienced bankers in Central Virginia who serve small businesses throughout their growth.
CDFIs which, are Community Development Financial Institutions, are a potential source of capital for those who may not qualify for a traditional bank loan. They are private-sector loan centers that offer financing for small businesses in areas of special interest, such as within low- and moderate-income communities. Six that serve Virginia can be found here.
SBA (Small Business Administration) loans are often available to small business that have difficulty accessing loans elsewhere, ranging from $500 to $5.5M. Eligibility requirements include doing business in the United States, being a small business, having invested owner equity in the business, and having found difficulty finding loans elsewhere. They are available through banks and financial entities that are approved SBA lenders.