Loans

The most common type of loans come from banks, which exist tolend money, so it’s no surprise that banks offer a wide variety ofways to fund a business’s growth. Here’s a look at how lendersgenerally structure loans, with some common variations:

Line-of-credit loans. The most useful type of loan for asmall business is the line-of-credit loan. This is a short-termloan that extends the cash available in your business’s checkingaccount to the upper limit of the loan contract. You pay intereston the actual amount advanced from the time it is advanced until itis paid back. Line-of-credit loans are intended for purchases ofinventory and payment of operating costs for working capital andbusiness cycle needs. They are not intended for purchases ofequipment or real estate.

Installment loans. These bank loans are paid back withequal monthly payments covering both principal and interest.Installment loans may be written to meet all types of businessneeds. You receive the full amount when the contract is signed, andinterest is calculated from that date to the final day of the loan.If you repay an installment loan before its final date, there willbe no penalty and an appropriate adjustment of interest.

Balloon loans. These loans require only the interest tobe paid off during the life of the loan, with a final “balloon”payment of the principal due on the last day. Balloon loans areoften used in situations when a business has to wait until aspecific date before receiving payment from a client for itsproduct or services.

Interim loans. Interim financing is often used bycontractors building new facilities. When the building is finished,a mortgage on the property will be used to pay off the interimloan.

Secured and unsecured loans. Loans can be secured orunsecured. An unsecured loan has no collateral pledged as asecondary payment source should you default on the loan. The lenderprovides you with an unsecured loan because it considers you a lowrisk. A secured loan requires some kind of collateral but generallyhas a lower interest rate than an unsecured loan. The collateral isusually related to the purpose of the loan; for instance, if youare borrowing to buy a printing press, the press itself will likelyserve as collateral. Loans secured with receivables are often usedto finance growth, with the banker lending up to 75 percent of theamount due. Inventory used to secure a loan is usually valued at upto 50 percent of its sale price.

Although the SBA doesn’t actually loan money itself, it doesprovide loan guarantees to entrepreneurs, promising the bank to payback a certain percentage of your loan if you’re unable to. Banksparticipate in the SBA program as regular, certified or preferredlenders. The most basic eligibility requirement for SBA loans isthe ability to repay the loan from cash flow, but the SBA alsolooks at personal credit history, industry experience or otherevidence of management ability, collateral and owner’s equitycontributions. If you own 20 percent or more equity in thebusiness, the SBA asks that you personally guarantee the loan.After all, you can’t ask the government to back you if you’re notwilling to back yourself. Here’s a quick look at the numerous loanprograms offered by the SBA for growing businesses:

The 7(a) Loan Guaranty Program. This is the primary SBAloan program. The SBA guarantees up to $750,000 or 75 percent ofthe total loan amount, whichever is less. For loans of less than$100,000, the guarantee usually tops out at 80 percent of the totalloan. A 7(a) loan can be used for many business purposes, includingreal estate, expansion, equipment, working capital or inventory.The money can be paid back over as many as 25 years for real estateand 10 years for working capital. Interest rates are a maximum of2.75 percent if over seven years.

The SBA LowDoc Program. This is a special 7(a) loanpromising quick processing for amounts less than $150,000. “LowDoc”stands for “low documentation,” and approval relies heavily on yourpersonal credit rating and your business’s cash flow. LowDoc loanproceeds can be used for many purposes. Applicants seeking lessthan $50,000 are required to complete only a one-page SBA form.Those seeking $50,001 to $150,000 submit the same short form, plussupply copies of individual income tax returns for the previousthree years and financial statements from all guarantors andco-owners. The SBA guarantees a 36-hour turnaround on these loanrequests.

The SBA Express Program. This is a close cousin of theLowDoc, also offering loans of up to $150,000. However, SBA Expressgets you an answer more quickly because approved SBA Expresslenders can use their own documentation and procedures to attach anSBA guarantee to an approved loan without having to wait for SBAapproval. The SBA guarantees up to 50 percent of SBA Expressloans.

CAPLine loans. These provide working capital through aselection of revolving and nonrevolving lines of credit. CAPLineloans are guaranteed by the SBA up to $750,000 or 75 percent of thetotal loan amount, whichever is less. The CAPLine program includesvariations for seasonal businesses, companies that need credit tocomplete a large contract, and builders and small companies thatcan’t meet requirements for other financing.

The SBA’s Minority and Women’s Pre-Qualification Loanprograms. These help women and minority entrepreneurspre-qualify for loans of up to $250,000. Private intermediaryorganizations chosen by the SBA help eligible entrepreneurscomplete a loan application. With the SBA’s guarantee attached, thebank is more likely to approve the loan.

The Microloan program. This program helps entrepreneursget very small loans, from less than $100 to as much as $25,000.The loans can be used for machinery and equipment, furniture andfixtures, inventory, supplies and working capital, but not to payexisting debts. Microloans are administered through nonprofitintermediaries using SBA funds. Terms are usually short, andapplication turnaround time is less than a week.

The CDC-504 Loan program. This program provideslong-term, fixed-rate loans of up to $1 million for financing fixedassets, such as land and buildings. CDC-504 Loans are made throughnonprofit Certified Development Companies. The program is designedto enable small businesses to create and retain jobs.