Being an entrepreneur requires hard work, grit and a willingness to invest in yourself. Few can finance their small-business dreams on their own and need the help of a lending institution. But will a bank be willing to invest in you, too?
When the time comes to look for a business loan to help jumpstart your upstart, here are five important things to know ahead of time.
Banking is a heavily regulated industry and after the passing of several laws, the amount of documentation required to establish a borrower with a bank is extensive. But don’t let it feel overwhelming – a good commercial lender will help you through every step.
If you’re looking at getting a commercial loan for the first time or you’re applying for a loan at a new bank, be prepared to wait, especially if real estate is involved. Given the current market, you can expect to wait anywhere from eight weeks to 12 weeks for an appraisal to be completed.
Banks are required to collect a lot of documents from the get-go. The more you can have ready to go for that first meeting with a banker, the better off you’ll be. This can include:
• Articles of organization
• Tax identification number for borrowing entity
• Operating agreement and/or corporate bylaws
• Social Security numbers and copies of IDs for beneficial owners/members/shareholders
• Two years’ worth of tax returns (business and personal)
• Personal financial statement for guarantors
A term loan is what most people receive when applying for a business or commercial loan. This type of loan functions with a single disbursement of a lump sum. You’ll typically have a fixed or floating interest rate with set parameters for three to five years with an amortization for somewhere between five and 25 years.
At the end of the term, the borrower should be prepared to either make a balloon payment to extinguish the debt or be ready to refinance any remaining amount. It should also be noted that commercial loans involving real estate do not escrow property taxes or insurance. The borrower is expected to budget for those items separately and will need to pay them annually in addition to the principal and interest payments required by the term loan.
U.S. Small Business Administration loans are government-backed loans. The government guarantees to pay 75%-85% of the total borrowed amount back to the lending institution in the event of a default.
However, a default does not mean the borrower is off the hook – they’ll simply owe the government instead of the lending bank. This extra layer of security reduces the risk assumed by the lending bank and helps borrowers qualify for loans when they fail to meet the regular credit or underwriting requirements of a traditional commercial loan.
There’s a substantial difference in the amount of paperwork required for SBA loans, and borrowers often must pledge collateral from their personal lives, as well. Borrowers also can expect a minimum of 90 days from start to finish. There also may be more fees associated with this approach versus a traditional term loan, and they can sometimes come with prepayment penalties.
Assemble a team
When starting a new business or operating an existing one, there are ramifications to the organizational structure you choose. It’s not the best idea to simply download an operating agreement template from the internet to try and avoid incurring attorney fees.
These documents will govern the way the business operates and interacts with banks, the IRS and members or shareholders. Make the investment to consult with an experienced corporate attorney, accountant and banker.
You’ll want to be certain that these professionals understand the needs of your business so they can help structure the organization in the most efficient way possible to ensure the ease of conducting business while limiting liability and tax burdens. Making the time and financial investment on the front end is likely to pay dividends in the future.
It’s not easy to get your business dreams off the ground, but knowing what’s involved with a business or commercial loan ahead of time can be an advantage – and for entrepreneurs, that can make all the difference.
Hunter Cox is vice president and commercial lending officer for Old Missouri Bank. He can be reached at email@example.com.
A baked goods vendor at Farmers Market of the Ozarks expanded to a brick-and-mortar operation; the first lending center for Old Missouri Bank opened; and London Calling Pasty Co. added a new food truck.