How to Apply For a Business Loan

Here is some quick and straightforward advice on how to get a business loan today from Barbara Weltman. In today’s tough credit market, if you need a commercial loan to buy equipment or machinery or to expand your business, be prepared (and qualified) for the loan process.

Have the right numbers
While lending standards vary from bank to bank, the following is a good rule of thumb if you expect to get a commercial loan:

  • Business owner’s FICO score of 680 or better. Since small business owners must give their personal guarantee for loans to their business (with the possible exception of mortgages on business property), they must have a good FICO score.
  • Cash flow (or debt service) rate of 1.5. Figure the rate by dividing income by debt. Lenders want to see that income is at least 40% greater than debt to achieve a cash flow rate of at least 1.5 to serve the debt.
  • Net operating profit of 15% to 20%. Net operating profit is your gross profit less expenses (selling, general and administrative costs; interest; depreciation; etc.), including officer’s compensation, provision for bad debt, and other¬†expenses. If your gross profit (net sales less the cost of goods sold) is $1 million, then your expenses should be no more than $800,000 to produce a net operating profit of $150,000 to $200,000.

These are not the only numbers that a lender will review. Be prepared to show a balance sheet with a favorable debt-to-equity ratio, a profit and loss statement, and any other financial documents requested by the lender.

Find the right loan program
Look for loan programs that make sense for your business. The Small Business Administration (SBA) increased its guarantee and waived fees on two of its popular loan programs — 7(a) and 504 — through the end of this month (legislation could extend this). Check with SBA lenders about these programs. Find a complete list of SBA loan programs here.

If you can’t qualify for an SBA loan (one that is guaranteed by the SBA but made through a commercial lender), consider alternative financing. Key options:

  • Vendor financing. If you need to buy inventory, machinery, or other items for your business, look to the seller for assistance. Vendor financing is typically short term and available on attractive terms.
  • Factoring. If you need cash quickly and are sitting on accounts receivable, use them to get the cash now. Factors can advance you cash based on your receivables and can usually arrange this payment to you within a few days. Your credit history is not taken into account in factoring. Learn about factoring from Smart Money SmallBiz. Find a factor through the International Factoring Association.
  • Credit card financing. If you need to buy something and expect to pay off the loan quickly, this is the easiest (though not the least costly) way to finance a purchase. Check with your credit card company for details; some cards, such as Chase’s Ink, let you choose which charges you’ll pay off immediately and which you’ll finance. View your credit card options at LowCards.
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