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Two out of every 3 individuals that call in to our firm ask about startup loans and whether or not they qualify. In a concise and very straightforward manner, I will discuss the most flexible business startup and expansion programs available on the market, who can qualify, and what the requirements mean in plain english (none of that banker speak).

Preliminary Information

Most startup and expansion loans are offered through certain banks under SBA guidelines. I do not know of any banks that offer these types of loans without the help of the SBA.

The SBA does not lend any of its own money. SBA guarantees loans that are given out by banks and effectively acts as a guarantor. This is a two step process…the bank underwrites a business loan application and then seeks to get a SBA guarantee on it.

This is important.

Since it is a two step process, most banks are more conservative than the SBA for fear that the SBA will not back their loans. For this reason, bank underwriting guidelines are *tighter* than SBA guidelines and so different banks can have different guidelines. You can save a lot of time and speak to someone knowledgeable about various banking programs before speaking to your bank’s SBA loan officer, giving her a pile of information and then getting declined in 60 days.

Who Doesn’t Qualify for SBA Backed Business Loans

Instead of putting this section towards the end of the article, I’m appropriately putting it here. Someone once told me that the only cardinal sin in all of business is wasting time. A vast number of businesses do not qualify for startup or expansion loan programs. Don’t waste time digging through the countless articles on SBA if your business happens to do any of the following:

REAL ESTATE INVESTMENT — A company cannot get financing to do real estate investments unless it is intending to buy and *occupy* the investments, or is purchasing the property for economic improvement. If a firm is buying properties to flip them, the properties are considered an investment and will not qualify for business financing. BUT — if a firm is considering renting a property out or taking over a rental property, a commercial loan can finance a business and its shareholders or owners. Certain commercial loans will not encumber the personal credit report of the shareholders if the company is showing sufficient assets, has been in business for a while and has good business credit.

LENDING ACTIVITIES — Banks, finance companies, factoring institutions, leasing companies, insurance companies (not agents), and any other firm that deals primarily with money doesn’t qualify.

PYRAMID SALES COMPANIES — Network marketing, MLM companies, etc are also on this list.

GAMBLING COMPANIES — Pretty self-explanatory

CHARITABLE, RELIGIOUS, OR OTHER NON-PROFITS –

And of course,

ANY FIRM DOING ILLEGAL ACTIVITIES —

Eligibility for Business Loans

Most decisions for business loans are based on credit factors, size standards, and the strength of the borrowers. By the last part, I mean that the borrowers must show the ability to run the business and demonstrate experience in the field. Without past experience approval is virtually impossible. Past experience must also show P&L responsibility at some level. In other words, the borrower must demonstrate the ability to financially manage the business. A strong financial plan must be in the business plan and yes, business loans almost always require a business plan.

Another factor that is often overlooked by new entrprenreneurs is personal investment. I have never seen any loan go through that has no risk or personal investment by the entrepreneurs. 100% business financing from banks is non-existent (and if you find a source that is willing to do 100% financing, please do let me know!). If an existing business is looking for capital, the owners must demonstrate that they have invested their own cash into the business, though this is not difficult to show in this case.

NOTE — there is a big difference between 100% business financing and financing 100% of business costs. The latter requires some creativity on the part of the entrepreneur but it is VERY possible.

Who Can Qualify for SBA backed Business Loans

FRANCHISES — good franchises are excellent candidates for business financing

CHANGE OF OWNERSHIP — Some odd guidelines here. Eligibility depends on whether the business would benefit from the change or preserve its existence. Partial ownership interests with no present interest isn’t eligible and neither is a part of an interest of a present and continuing owner. In other words, one cannot buy a business if they don’t already have ownership or cannot buy a portion from an existing owner where the owner still continues to own a part of the business.

RECREATIONAL FACILITIES AND CLUBS –

FARMS AND AGRICULTURAL BUSINESSES –

FISHING VESSELS –

MEDICAL FACILITIES –

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Filed under: Business Loans