Banks are lovely places to get money . . . when they have money. Things may loosen up soon, but the operating environment today for most commercial banks is, to be blunt, a disaster area. Alternative financing isn't all that alternative right now.
Start-up capital often begins with your own savings and small loans from friends and family. Many other lenders will want to see some “skin in the game” on your part, to know that you have a personal stake in the outcome of their investment.
You have options outside of large commercial lenders to find starting capital, and we're not talking about the local mob boss. But, as you start your search for cash, you should understand that the more nontraditional your financial arrangement, the more it will likely cost you. There's a tradeoff between the size of a loan and the effective interest rate you're probably going to be able to get for that loan.
Still, there are some advantages to looking outside of a bank. Non-bank business lenders will often be able to lend smaller amounts than a bank. The minimum commercial real estate loan at many banks is set at $250,000, but $100,000 for nonbank sources. You may not need as deep a business plan for a nonbank loan. Alternative sources may also be willing to offer a loan without requiring you to put up your personal property as a second source of collateral, as most banks do.
Keep in mind – lending standards may change, both for banks and for other financing sources. The world is a little weird right now. Change is the only constant, so be prepared to be flexible.
Non-bank lending covers a wide variety of finance. For example, some life insurance companies offer financing for small business loans. Credit unions and credit card companies count as non-bank lenders. Some of your suppliers may be willing to float short or long-term loans by giving you a longer period to pay their invoices. And for startups, the angel investing community might be willing to take an equity stake in your business.
For companies with a history of sales, some lenders can offer loans based on a history of credit-card receipts and invoices – this is called cash-flow lending. Others will be willing to buy unpaid invoices from you at a small discount and collect the money owed by your customers – this is called accounts-receivable financing and factoring.
Anyone willing to lend you money – aside from your mother – will probably want significant personal and professional information about you. Here's what the Small Business Administration tells you to expect:
Forms vary by program and lending institution, but they all ask for the same information. You should be prepared to answer the following questions. It’s a good idea to have this information prepared before you fill out the application:
Either as part of the loan application or as a separate document, you will likely need to provide some personal background information, including: previous addresses, names used, criminal record, educational background, etc.
Some lenders require evidence of management or business experience, particularly for loans that can be used to start a new business.
All loan programs require a sound business plan to be submitted with the loan application. The business plan should include a complete set of projected financial statements, including profit and loss, cash flow, and balance sheet.
Your lender will obtain your personal credit report as part of the application process. However, you should obtain a credit report from all three major consumer credit rating agencies before submitting a loan application to the lender. Inaccuracies and blemishes on your credit report can hurt your chances of getting a loan approved. It’s critical you try to clear these up before beginning the application process.
If you are already in business, you should be prepared to submit a credit report for your business. As with the personal credit report, it is important to review your business’ credit report before beginning the application process.
Most loan programs require applicants to submit personal and business income tax returns for the previous 3 years.
Many loan programs require owners with more than a 20% stake in their business to submit signed personal financial statements.
You may also be required to provide projected financial statements either as part of, or separate from your business plan. It is a good idea to have these prepared and ready in case a program for which you are applying requires these documents to be submitted individually.
Many loan programs require one year of personal and business bank statements to be submitted as part of a loan package.
Most loan programs require details of a business’ most current financial position. Before you begin the loan application process, make sure you have accounts receivable and accounts payable.
Collateral requirements vary greatly. Some loan programs do not require collateral. Loans involving higher risk factors for default require substantial collateral. Strong business plans and financial statements can help you avoid putting up collateral. In any case, it is a good idea to prepare a collateral document that describes cost/value of personal or business property that will be used to secure a loan.
Keeping good records is essential for running a successful business, but even especially critical when applying for a loan. Make sure required documents are orderly and accurate. All information you provide will be verified by your lender and the organization guaranteeing the loan. False or misleading information will result in your loan being denied. Finally, make sure you keep personal copies of all loan packages.