Applying for a business loan is no small thing… it requires a substantial amount of paperwork to demonstrate the business is able to repay the loan. Several years of operating history, tax returns, balance sheets and other documents provide valuable insight to reassure a lender that the business is able to handle new debt.
So what happens if there is minimal operating history, or if the business is a start-up venture that hasn’t had enough time to develop consistent revenue? What if the business is not profitable? It’s often still possible to get a loan, but lenders must find other ways to ensure a loan can be repaid.
Common solutions include personal guarantees from key stakeholders in the business, readily marketable collateral valued above the loan amount, a larger cash down payment and switching from conventional financing to government guaranteed loans.
Small Business Administration (SBA) and United States Department of Agriculture (USDA) loan programs don’t lend money directly, but provide their approved lenders with a credit guarantee to help make the lender more comfortable with a level of risk they might otherwise not be willing to take. If the business defaults, the bank is partially protected against loss via a government guarantee.
“Banks are simple interest lenders versus other forms of capital sources for companies (equity, mezzanine, hard money), which results in banks having a different and generally lower risk profile for their customers. This helps the borrower secure more attractive rates, but it also means the bank requires a certain comfort level to underwrite a business loan. They’re conservative risk managers and lend accordingly,” says Jim Nelson, senior commercial lending manager at Horizon Community Bank’s Mesa branch.
Borrowers who are a bit more of a credit risk or who have a less established business often find their banker steering them toward SBA loans, or USDA loans if they’re in a rural area. The federal guarantee makes the banker more comfortable, but the application process can be more vigorous and move more slowly than conventional processes.
Bank financing typically provides the most attractive rates for business loans, however not every startup is able to meet criteria for financing approval, even with governmental support. Personal financial solutions are typical alternatives, such as a home equity or personal loan, credit cards, online quick loans and borrowing from friends or family. Non-bank lenders are also an option, although they can be expensive. For a business seeking more significant funding of amounts in the millions, private money through equity or “angel” investors might be appropriate.
To learn more, speaking to your banker is a smart first step for detailed information or referrals. Other useful resources also include the SBA website, the Arizona Small Business Association, the USDA if the business is in a rural location, the Arizona Commerce Authority and Angel List.