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Improve Your Chances Of Getting A Business Loan

Is your money shrinking and you feel like you need a business loan? Too many people feel the pressure of throwing together a loan package quickly. These are three identifiable and proven ways to improve your chances of getting a business loan.

Apply for a business Loan with your Business Name Instead of Your Given Name: For instance, use your business loan, “Sarah’s Block Company” versus your given name – “Sara Smart.” The reason you need to apply for a business loan in your business name is because it is a business loan – Not a personal loan. The banks and loan institutions are more than happy to help your business with a business loan, but they shy away from making a business loan to a person. Having a business that is a corporation or LLC improves your rate of success – For example, an S-Corp, C-Corp, or LLC.

Sole Proprietors have difficulty as business owners getting a business loan because they lack the same credibility of being identified as a ‘business’ that goes with a business formed as a corporation – A business that is complete with By-Laws, tax ID number and business bank account. A business portrays the ‘image’ of success better than a person does. It’s because of that, that lending institutions work better for those business people. As a sole proprietor, a person ‘appears’ to be acting in their own interests as an individual-instead of a business. Loans to sole proprietors are rated on the personal credit history and not a separate business history for the credit reporting agencies. That doesn’t look good to loaning institutions.

Even Corporations can mix up personal and business debt. It’s an easy trap to get caught in. Let’s say that you own a construction company and you get a construction loan to develop a piece of property, but use that money to make repairs on your personal home. Although there are multiple ways to justify this, the financial company won’t see it that way. Neither will the IRS agent at tax time. And there is a double penalty for doing this too – If you are audited and have mixed your expenses the IRS may choose to ‘dis-allow’ ALL your business expenses. You can see quickly that this could become the stuff people describe as, “the stuff that hits the fan.”

There are countless examples of mixing business with personal expenses – let’s say you get a business loan for a business computer, but you have some extra cash from the loan. You may think to yourself that you could get that new computer for the kids with the extra money – Bad choice.

On the other side of a business loan is a credit card in your business name. If you practice the same behavior with the credit card that you do the business loan, you will experience the same results.

The second thing to happen from this is that now you are taking a chance on damaging your personal credit score. This lower credit score affects all things with the passing of time. When you truly need the business loan – at a later date – You may not qualify.

Credit scores are a fickle bunch. They depend and rely heavily on past performance, previous and current balances and how close to your credit card limit your balance is (for example, do you have a credit limit of $500, and have charged $480 on that credit card? Consistently? This means that you are ‘always’ in debt at over 90 percent of your credit card limit).

At that rate, with a few of those over 50% of your total “AVAILABLE” balance listed on your credit history, your business loan approval rating goes down to about a zero. Available balance means the total balance you are listed as having access to – For instance, your balance is $250.00, but you have an available balance of $500.00, so (in theory) you could charge up to $500.00.

Don’t do it – Never charge your credit card balance over half of the total balance available to you. Even $1.00 will make a difference on your credit score (a negative one).

Another thing you might not know about credit scores is this: If you want to get the best deal on a car or any other item and you use a ‘credit broker,’ to help you. The job of a credit broker is to take your personal and business Identification and go shopping with your credit for the bet deal they can get you. As your credit is ‘hit ‘ with each inquiry from the individual ‘dealers,’ your credit score goes down an average of 2-4 points per inquiry, per credit bureau. That means if you went car shopping and your credit broker found 40 different credit buying ‘deals’ for you, your total credit score would be reduced approximately 80-160 total points per credit reporting agency. If you were marginal good credit before – Now your credit stinks. Plus, as your credit scores spirals down, the interest rate you qualify for goes up – Whoa! It’s a game for them. It stinks for you.

The ultimate outcome from all of this is that now you are ready to get a business loan. As the owner – or principal of your business, your banker needs your personal credit score to judge whether you are a good credit risk for your business loan. To complete that business loan with any success, your score must be a good one. This is a great thing to remember when you are beginning in business. It’s how you protect yourself that counts.

Get more than one business loan application from more than one lending institution – Not just one. Imagine that this is your business: You are a corporation with a clean credit record. You are new to business and have not yet applied for a loan in your business name, so you have no business history in debt repayment to reference for a business bank loan. Your company is expanding and you need to take it to the next level. You need a couple of additional employees and some specialized tools to manufacture and produce your product for the additional customers you have added to your lists.

Where in the world will you go to ask for that money? You have no loan history.

Don’t let a lack of business loan history stop you. Go ahead and figure out what you need to move forward and ask for several small business loans instead of one large business loan. Your chances of business loan approval are dramatically increased by using this method and you will gain experience with creating a loan history easier for about the same cost as one large loan for everything.

You may be better off to apply for an unsecured line of credit that could be based on your stated income versus a full-blown loan application process. Sometimes that’s key to whether or not you get the money you need and the approval you want. Not only are these lines of credit easier to get, because they offer fewer restrictions, but they will give you a business history to reference the next time you need to expand and grow your business.

Also, you could also use up to HALF of any credit card balances you have available to you as unsecured loans to get you going through that expansion phase. keep in mind credit card interest rates, penalties for late payments and other factors that may mess up your credit. Plan for the worst case scenario and have a back-up in place for that situation or it will haunt you.

And that, is simply a three-step process for business loan success.

Are SBA Loan Limits Good for Small Businesses?

Last March, the Small Business Administration (SBA) assigned a limit on the agreement it was offering on “goodwill” financing, limiting them to $250,000 or 50% of the total amount of SBA loan, whichever amount was lower. “Goodwill” financing is an essential part of the SBA loan designed to obtain the intangible assets for any existing business. The limits mentioned beforehand were set to avoid the inflation of the intangible assets’ value. This is one of the reasons why you need to be practical when applying for an SBA business loan as a step towards achieving your entrepreneurial dreams. There are many other important things that you need to know about utilizing SBA loans to start or acquire a business.

The SBA loan limit

An SBA business loan is one of the most popular methods of funding a small business. Basically, this type of loan offers banks a guarantee on any small business loan, giving banks more reason to approve the loan.

There are two major SBA business loan programs available today. These are:

- The 7(a) loan program – This is an organization’s most adaptable and popular initiative. It is designed to offer SBA commercial loans to small businesses, both start-up and existing.

- The CDC/504 loan program – This program offers long-term and fixed-rate funding, which is aimed at obtaining fixed assets.

The loan programs have distinct maximum loan amounts. The 7(a) loans have a maximum limit of $2 million, while the CDC/504 loans range from $1.5 million to $4 million, depending on the type of business and other criteria.

As a means to assist small businesses during the recession, the current US administration proposed to increase the loan size cap for standard CDC/504 and 7(a) loans to $5 million. A similar proposal was submitted for CDC/504 manufacturer loans, to be increased to $5.5 million. These developments will allow entrepreneurs to take on larger ventures or projects. Congress is now considering the said proposal.

The SBA loan requirements

Aspiring entrepreneurs need to meet a number of requirements to be eligible for an SBA loan application. First off, you must have applied for a conventional business loan from a commercial institution, and have been turned down. You will not be eligible for SBA business loans if you are able and capable of acquiring investment funding from other sources. In addition, you are required to identify the specific program in which you want to receive an SBA business loan for, because each program covers different requirements:

- For loan 7(a), you must have the ability to pay back the loan from your business cash flow, with a maximum duration of 25 years. Also, your business should be for profit and should meet the requirements set by SBA for small businesses.

- For the loan CDC/504, it is only be accessible if your venture is operational for profits, has a net worth lower than $7,000,000, does not exceed the size required by the SBA, and has a net income that does not exceed $2,500,000. This type of SBA loan can only be utilized for projects with fixed assets.

For faster assessment of your eligibility for SBA loans, you need to prepare the following information when you meet with a lender:

- business profile that includes the type of business, length of operation, and employee statistics.

- Loan request that shows the purpose, type of loan, and the amount.

- Collateral description

- Business financial statements for the past 3 years, including the latest interim statements.

- Personal financial statements of other officers, partners, stockholders and owners.

The SBA loan rates

The SBA loan rates are among the major concerns of most entrepreneurs when applying for an SBA business loan. This is, indeed, a complex issue that needs thorough discussion between you and the lender.

In 7(a) type SBA loans, the interest rates can be negotiated, but these should not exceed the level required by SBA. On the other hand, fixed rate loans have the following interest rates:

  • Loans amounting to $50,000 or higher – base rate plus 2.25 percent (with maturity of less than seven years) or base rate plus 2.75 percent (with maturity of seven years or more)
  • Loans between $25,000 and $50,000 – base rate plus 3.25 percent or base rate plus 3.75 percent.
  • Loans $25,000 or less – base rate plus 4.25 percent or base rate plus 4.75 percent.

The CDC/504 commercial loan rates are fixed to an increment that is above the market of U.S. Treasury’s 5-year and 10-year issues.

Aside from the loan programs mentioned above, there are many others available for prospective entrepreneurs. As the country’s economy slowly rises out of the shadows of recession, this is exactly the kind of assistance small businesses need to succeed and prosper. Now, which types of SBA financing programs appeal most to your entrepreneurial preference?