Guest post by Dale Gunther, Vice Chairman of the Board, People’s Utah Bancorp
In a down market, many small businesses tighten their belts and hold their breath until the economy starts to normalize. Others take advantage of their competitors’ timidness by using a down market as a prime opportunity to expand.
If you’ve been thinking about growing your business, but don’t have the capital to do so, now is a good time to consider a small-business loan. Because many businesses are holding back, banks have ample money to lend to qualified small-business owners.
But many business owners feel overwhelmed by the loan process and don’t know where to start. Here is a guide to navigating small-business financing.
Prepare or update a business plan. Lenders want to know you have a plan for your business’s success—and they want you to prove it. Create or update your company’s business plan, being sure to include the company’s goals and financial projections. You should also include the following elements outlined by the U.S. Small Business Administration (SBA):
— Begin with a statement of purpose. You should be able to explain your business in 25 words or less.
— Illustrate how your business will work and why it will be successful. List the owners.
— Describe the company’s products or services, the customers, the market and the competition. List the managers and their credentials.
— Supply three years of projected financial statements. Include income, loss and cash-flow projections.
— Provide supporting documents, such as references from creditors and potential clients and suppliers, and evidence of insurance.
Understand different types of financing. There are three types of loans most commonly used by small businesses:
Business lines of credit are used for short-term cash needs such as building up inventory and funding accounts receivables so you can offer your clients competitive terms. You can borrow up to a pre-determined limit on your line of credit and must pay it back when your inventory sells or your accounts receivable are collected. You can then borrow up to the limit again as your cash-flow cycle requires. Lines of credit are short-term funding options and should not be used to fund purchases of long-term assets, such as major equipment or buildings. These lines are required to be “rested” or paid to zero and left at zero for a specific period of time during each year.
Business term loans allow a certain dollar amount to be repaid in installments over three or more years. Loans with a five-to-seven-year term are commonly recommended for purposes such as financing the purchase of equipment, a vehicle, furniture for renovations or expansions, while longer-term loans for 20 years or more are typically used for commercial mortgages or major equipment purchases. All are often secured by the asset that is purchased or built.
Personal lines of credit, such as credit cards or home equity lines of credit, are convenient, but risky.Credit cards usually have double-digit interest rates and can negatively impact personal credit, while home equity loans use your home as collateral—meaning if you default, you can lose your home. Business owners should consider bank loans, which carry lower interest rates than credit cards, before personal loans.
SBA loans include business term loans and lines of credit with a certain portion of the loan—up to 90 percent—guaranteed by the SBA. This guarantee makes it more likely you’ll be approved for attractive rates and financing, since the risk to the bank is shared with the SBA.
Consider your options. You don’t have to get your business loan from the bank that holds your business or personal deposits, though that sometimes has a positive impact on the lender’s decision. Most commercial banks offer SBA loans, but only some are SBA Preferred Lenders, which means they can approve your loan faster than non-preferred lenders. You may also have more luck at a community bank than a big bank, as a recent survey by Biz2credit found that of 1,000 small-business loan applications, 45 percent were approved by community banks while only 9 percent were approved by banks with assets above $10 billion. In other words, community banks approved five times more small-business loans than large banks on average.
Dale Gunther is vice chairman of the board of People’s Utah Bancorp, the holding company for Bank of American Fork , which is an Equal Housing Lender and Member FDIC. At the start of his 16-year tenure as CEO at Bank of American Fork, the bank had two branches and $80 million in assets; it now has 13 offices and more than $880 million in assets. Dale has served as chairman of the Utah Bankers Association and currently serves as an American Fork city councilman. This article should not be considered legal or investment advice. Seek legal and investment advice from your own qualified professional.